US real estate investment trusts (REIT) and master limited partnerships (MLP), which are popular with US midstream energy companies, are very similar in terms of their legal structures, but the business and financial characteristics of rated REITs and MLPs have differed in some significant ways, as has their rating performance, according to a report published by Standard & Poor’s Ratings Services on October 15.
Structurally speaking, the similarities outweigh the differences, says S&P. REITs and MLPs have the status of “pass-through” entities under the US federal tax code, meaning that their earnings are generally not subject to income tax at the corporate level. Equity investors are still subject to income tax on the distributions they receive, but these investors avoid the normal double taxation of corporate earnings.
In terms of their legal structures, REITs and MLPs are somewhat different. A typical REIT we rate has a publicly traded corporate parent company, which in turn owns a principal operating partnership that serves as an intermediate holding company, owning operating assets and issuing debt. (The parent company, though, typically issues preferred stock.) MLPs, in contrast, are partnerships, generally lacking the corporate parent company. An MLP’s general partner controls and is responsible for operating the partnership, with other “unit-holders” having almost no role in how the partnership is managed.
In the midstream energy sector, Standard & Poor’s currently rates 37 MLPs. As of Sept. 30, 2012, these MLPs had about $121 billion in rated debt and had an aggregate equity market capitalization of over $253 billon.
The MLP ratings range from 'B-' to 'BBB' with an average rating of about 'BB'. The midstream sector (for example, natural gas, refined products, and crude oil transportation and storage; natural gas gathering and processing; and retail propane) accounts for the overwhelming majority of MLPs both industry wide and among the companies rated by S&P.
In the real estate sector, Standard & Poor’s currently rates 58 publicly listed REITs based in the US and Canada. These encompass companies with a varied range of business models: Most rated REITs specialize in a particular property type (for example, office, industrial, retail, health care, multifamily residential, or self-storage), while a smaller number are diversified, operating across a number of different subsectors.