High Yield MLPs & mREITs Flashing Warning, Danger, & Opportunity

Observations And Lessons From The Controversy And Volatility Surrounding Linn Energy (LINE), Annaly Capital Management (NLY), And Kinder Morgan Energy Partners, L.P. (KMP)

Over the past months there has been a noticeable spike in both the volatility and number of articles covering LINE, KMP, and NLY. Even a cursory review of what happened with each of these stocks reveals some telling warnings and opportunities for income investors.

The most recent chapter in this saga began last week with a bearish report on KMP, one of the most highly regarded MLPs, by 26 year-old analyst Kevin Kaiser of Hedgeye Risk Management LLC, who appears set on attacking the MLPs. They’ve been among the past decade’s very best performing sectors in terms of both yield and price appreciation. The report has been widely criticized, but it has also been widely discussed.

Not only has the number of articles soared, but also the level of interest. Income investors, many very knowledgeable, comprise a significant part of seekingalpha.com’s huge readership. So SA can serve as an effective informal barometer of what are the hot topics among income investors. Anyone monitoring seekingalpha.com’s “Top Articles,” (most popular) over the past months will have noticed that every week the list seems to include at least one article on these or similar MLPs or REITs.  As of this writing the list contains not just one, but two, and arguably a three  such articles.

Why, and what does it mean? Like my last article, this one is as much an attempt to solicit answers as to shed whatever light I can.

Background: Roots Of The Controversy And Volatility


In the case the two high-yielding MLPs, Linn Energy (LINE) and Kinder Morgan Energy Partners, L.P. (KMP), the origins of their volatility have been very similar. Articles from professional analysts and/or financial journalists questioned the sustainability and growth rates of their cash distributions, and so concluded that their share or unit prices were materially overvalued.

Unlike the NLY and KMP, NLY’s troubles were not company specific but rather …continued