“PTP’s — Neil George’s High Yield Partnerships”

by Travis Johnson, Stock Gumshoe | January 19, 2008 6:55 am

This is an ad that I’ve been seeing lately from Neil George[1] at KCI publishing, one of the big newsletter publishers. He edits or works on several different newsletters, but the one in question here is a new one: The Partnership, which seems well positioned to take advantage of recent investor enthusiasm for high yield[2] investments.

And since many of my readers are among those who are so enthused about high dividends[3] (and hey, I like money in my pocket as much as the next guy), I thought I’d take a quick look at the investments George has been teasing lately.

The investments he covers in this service are called, by him at least, “Publicly Traded Partnerships” (PTPs). These are either Master Limited Partnerships[4] (MLPs) or Limited Partnerships (LPs) that are publicly traded, usually on a major exchange like the NYSE.

He’d like you to pony up $399 for a year of The Partnership, and if he does I’m sure he’ll share with you lots more information about the various PTP’s out there … but he also teased several of his favorites in the ad, so I thought I would go ahead and try to sniff those out for you if you want to get started.

MLPs and similar partnerships have been prevalent in the oil[5] and gas industry, primarily in pipeline and storage facility ownership, for many years — and for a long time they flew under the radar because they’re kind of mysterious, a bit complicated for investors, and, though they are designed to minimize taxes, they can cause tax headaches for people because their reports generally come out much later than the other investment tax forms you get from your broker.

There are also some folks who were active investors (or just paying attention) 20 years ago who won’t touch them at all — oil and gas partnerships used to essentially be just tax shelters until the tax code was changed in 1986, so some folks remember the huge hit they took when the tax code obliterated their (then) reason for being.

But now, they’re certainly legitimate and are genuine income producers, if a bit different in structure than most. To some extent they can be compared to REITs[6], since the income they generate is passed along to the unit holders (shareholders). They’re also expanding in recent years and are being used more in other sectors — there are still lots of oil and gas MLPs you can buy, but there are also some in finance (Blackstone Group, which IPO[7]’d last summer with ticker BX[8], is a publicly traded partnership) and in many other industries.

Generally, the benefit of PTPs for investors is a steady and increasing dividend payout, which may or may not be tax-advantaged to some degree. Many of these kinds of firms can pay out substantially more than their reported earnings, since their cash flow is much higher than earnings and includes substantial depreciation charges (especially for those in shipping, pipelines, and other capital-intensive businesses). So the best ones have high and growing yields, it seems they’re now mostly in the 6-8% range, but there are plenty of outliers at both ends (and plenty of high yielders whose yield isnt’ necessarily sustainable).

So I thought I’d share a couple of the many that he has teased over the past month or two:

“Toll Collector. Buy this one and you’ll own the vital infrastructure that makes economies tick. Governments are selling off roads and bridges to this company which then runs them and collects the daily tolls. This is its first partner deal in the U.S., which it put together to acquire and run a collection of roads, airports and parking garages. The cash flows are generous and growing, and it currently pays more than 6.5%.”

This has to be Macquarie Infrastructure Trust (MIC[9]). This is one of several affiliates of the big Australian bank, Macquarie, which owns and manages many infrastructure investment vehicles around the world. The parent Macquarie has had some trouble in the last six months or so, with a big dip in the Summer and a couple months of steady decline since … and MIC, rightly or wrongly, has more or less followed the same path since November or so. It’s down quite a bit and raised the dividend in December, so it now yields over 7%.

I don’t know much about this one myself, other than the fact that they do own a pretty wide variety of assets, some as teased and more still — from airport parking garages to natural gas[10] distribution, it’s a long list.

There was a pretty decent article about them on SeekingAlpha[11] by fellow high-yield newsletter tout Carla Pasternak[12] about a year ago if you’re interested, but with the current malaise there doesn’t appear to be any rush … as with pretty much all investments right now, it seems we’re little disadvantaged by taking our time to research them fully. There’s a cautionary article about the business from Fortune last fall[13] that might help round out your understanding of the various issues involved with the privatization of infrastructure.

And the second one that sounded interesting:

“Profits in the Sky. As air travel sets new records each passing year, the assembly lines at Boeing and Airbus keep humming. One of their best customers is this aircraft-leasing partnership based in Ireland but trading in the U.S. It leases both passenger and cargo planes to major carriers. Revenues should ramp up nicely during the coming years, providing us with rising distributions and share prices. It is currently generating distributions in the mid-8% range.”

Because of the way Ireland has structured its tax code, the emerald isle is a haven for aircraft leasing companies. There are two significant ones that I know George has liked in the past, Genesis Lease (GLS) and Aircastle Leasing (AYR). They have both been clobbered beyond belief in the last couple months, probably because leasing companies are essentially financial companies — with further risks on top of that — so everyone is terrified of them right now.

Both are nearly 50% below the highs they reached last Summer, and both have dividends above 10%, though I suspect there’s some danger to those dividends or the price would not have fallen quite as far as it did. I know Jim Cramer has been a booster of Genesis Lease at least once in the past few months, though I don’t know if he likes it now. Aircastle actually raised it’s dividend just a month or so ago, so that might be a positive sign for them. Purely on the numbers, AYR looks more appealing to me, but both have charts that look like double-diamond ski slopes (going down, unfortunately), so I expect there must be some skeletons in there that are scaring everyone off, including perhaps the continuing delays from both Boeing and Airbus as they work to get their newest planes in the air.

And one more partnership for you to consider, if you’re so inclined:

“Shipping Winner. Natural gas will be the world’s fastest-growing fuel for at least the next 20 years. But the biggest reserves are continents away from the biggest consumers. So this partnership’s fleet of liquefied natural gas tankers is in constant demand.

“Unlike many companies in the oil tanker business, it doesn’t lease its ships out on short-term contracts, but at fixed fees for 15- to 20-year periods. As a result, cash flows are generous and dependable, ideal for a PTP structure. It just announced that its fleet will be expanding from five LNG tanker ships to 13 in three years. Few PTPs can boast that level of growth. No wonder its distribution is growing so fast, at 13% a year.”

This one has to be Teekay LNG Partners, LP (TGP[14]). This was spun off from parent Teekay Shipping a few years ago (Teekay is one of the larger tanker fleet owners in the world), and they are indeed a partnership that transports liquefied natural gas, along with liquefied petroleum gas and crude oil. They are actually up to seven LNG ships now, but a few months ago they did have five, before the last two rolled into the water[15], and they do have an order book for 6 more for a total of 13.

It’s a bit of a red herring to say that their vessels are chartered at fixed fees for long periods, because nearly all LNG tankers are — there just aren’t enough of them, nor enough terminals or enough steady demand, to foster a strong spot market like they have in crude oil (the spot market is when you book a vessel for a single voyage, if ships are tight the price is higher, if there are a lot of ships available the price is lower). So there is that steady income that should be reliable.

There have been various attempts to build a big international LNG trade in the past — and there is certainly a significant trade in the stuff now, but the tankers are expensive to build (the LNG has to be pressurized and cooled for transport, not just poured into a tank) and the infrastructure is somewhat limited and new LNG terminals scare the h*ll out of people who live near them — this is, after all, highly pressurized and highly flammable gas, thus the big fight over attempts to expand LNG terminals in Boston harbor (if I remember correctly) a few years ago.

Still, LNG is already heavily traded in Asia[16], where Korea[17] and Japan[18] are particularly dependent on it, and places like Trinidad are very dependent on LNG exports (the US gets more than half of its imported LNG from Trinidad, which is probably not all that great for the shippers because it’s a short trip … if you’re an oil tanker owner, for example, you want the U.S. to have to get all it’s oil from the Middle East[19] and to use huge ships that have to go around the Horn of Africa[20] … that way you have a longer voyage, higher payday, and more demand for more tankers because each voyage takes weeks).

The yield on this one is a hair under 7%, and though it’s fallen with the market lately it isn’t down nearly as much as some of the other PTP’s noted here — the positive for this company is that LNG is a growing business and they have young ships that should last for decades … the primary negative I’m aware of is that there are plenty of people who don’t like having LNG offloaded near them, or shipped through sensitive areas, and if oil prices fall significantly demand for LNG may fall as well (oil is much cheaper to transport, so industries that can switch from one to the other might go back to oil). LNG essentially competes with local, pipeline-transported natural gas, so it is clearly strongest in parts of the world that don’t have significant natural gas reserves, but do have high demand for this cleaner-burning fuel.

So … I don’t have any strong feelings about any of these, but if you’re looking for good dividends in an area where shares might be more depressed than the business prospects warrant, you could do worse than to take a good look at PTPs. Do note that the taxes will be slightly more complex than with most investments, so if that matters to you it might be worth your time to learn a little bit more about that.

If you’re an investor in any of these companies or similar industries, or if you have an opinion, we want to hear it (or I do, anyway) — let ‘er rip.

And for all my US readers, have a great holiday weekend

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