Hoegh LNG Partners Preferreds: 14.4% Yield While Balance Sheet Improves (OTCMKTS:HMLPF)

Introduction

Although the main entity Hoegh LNG Partners was delisted upon the acquisition, the preferred shares are still trading but on an over the counter basis with (OTC:HMLPF) as ticker symbol. It goes without saying the lack of access to a Tier-1 listing hurts the share price of the preferred shares. That being said, ever since the delisting, Hoegh LNG Partners continued to pay the preferred dividends while it also still publishes detailed financial statements on a quarterly basis.

I still have a long position in these preferred shares, and because of the elevated risk of dealing with an unlisted entity, I like to keep close tabs on Hoegh LNG Partner’s financial performance. As soon as I see any signs of a substantial deterioration, I’m willing to bail.

This article is meant as a follow-up on my previous coverage of Hoegh LNG Partners’ preferred shares, which you can find here.

The partnership remains profitable – and that’s good news for the preferred shareholders

In the second quarter of 2024, Hoegh LNG Partners reported total revenue of approximately $37.4M, a small decrease of approximately $0.5M compared to the second quarter of last year. On top of that, the vessel operating expenses increased by about $2.4M, so I was already preparing for a weaker set of results. Fortunately, Hoegh also had some positive achievements: The administrative expenses were cut by 50% while the net interest expenses also decreased by $0.2M.

This resulted in a pre-tax income of $21.5M and a net profit of $20.7M at the level of Hoegh LNG Partners, which means plenty of profit was generated to cover the $3.9M preferred dividend payments. The net profit attributable to the common unitholders of Hoegh LNG Partners came in at $16.8M.

Expanding the view to include the Q1 results, we see a similar result. The partnership needed less than 20% of its earnings to cover the preferred dividends: Of the $37.2M in net profit, about $7.75M had to be paid out as preferred dividends. And that’s a good enough ratio for me.

One of the main risks of owning a preferred security that isn’t trading on a main exchange anymore after a buyout is the new owner trying to siphon as much cash out of the entity as possible. That’s allowed as preferred shareholders are entitled to the preferred dividends but have no say in how the capital allocation plans are being executed.

In Hoegh LNG Partners’ case, this is not happening. As per the cash flow statement shown below, the reported operating cash flow in the second quarter was approximately $16.7M, but this includes a net investment of $7.8M, so the underlying operating cash flow was approximately $24.5M.

The total capex was $1.24M, resulting in a net free cash flow of in excess of $23M. A good result, but what really matters here are the financing activities shown above. As you can see, the only cash distributions that were made during the quarter (and during the entire first semester) were the cash payments to the preferred shareholders. All other cash flow was used to repay debt.

At the end of the second quarter, Hoegh LNG Partners had about $53M in cash, $25.6M in short-term debt and about $222M in long-term debt for a net debt of around $195M. On a total amount of $552M in owned vessels, the debt to owned assets is pretty low. Additionally, the balance sheet contains about $248M in investments in finance leases as well.

With total liabilities of $293M vs. $988M in assets, I have no issues with the balance sheet from the perspective of a preferred shareholder. Of the $695M in equity, only $176M consists of preferred equity, which means there’s about $520M in common equity which ranks junior to the preferred stock. And, of course, the common equity will absorb the first losses when issues arise.

The preferred shares still pay a generous dividend

There are 7.09M preferred shares outstanding (for a total preferred capital of $176M) that offer an annualized distribution of $2.1875 per share, payable in four equal quarterly tranches of just under $0.55 per quarter. So far, the company has continued to pay the preferred dividends, which represent an 8.75% yield on the principal value of $25 per preferred share.

As the preferred shares are currently trading at $15.15, the current yield is approximately 14.4%. And given the strong results of Hoegh LNG Partners, it’s surprising to see a yield this high and I think the sole reason is the fact the stock is listed on the expert market and not every retail broker allows its customers to buy on this exchange. Shareholders can always sell (even with brokers that don’t allow any buy orders) but the pool of potential buyers is limited.

Investment thesis

I have a long position in Hoegh LNG Partners’ preferred shares, and I still have an active order to buy more stock in the $12 range. I’m considering increasing my limit order considering A) the partnership’s balance sheet is getting safer as cash flow is used to reduce debt rather than enriching the common unitholders, and B) as interest rates on the financial markets are now slowly decreasing, I wouldn’t mind increasing my exposure to a 14% yielding security. That being said, although the partnership is performing well, this is a higher risk security, so the total weight in my portfolio will remain very low.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.