PrefBlog

Artis Real Estate Investment Trust has announced:

that is [sic] has entered into an agreement to sell to a syndicate of underwriters led by TD Securities Inc., RBC Capital Markets and Scotiabank (collectively the “Underwriters”), on a bought deal basis, 4,000,000 Cumulative Minimum Rate Reset Preferred Trust Units, Series I (“Series I Units”) at a price of $25.00 per Series I Unit (the “Issue Price”) for gross proceeds of $100,000,000 (the “Financing”). Artis has also granted the Underwriters an option, exercisable at any time up to 48 hours prior to the closing of the Financing, to purchase a further 1,000,000 Series I Units at the Issue Price, which, if fully exercised, would result in additional gross proceeds of $25,000,000.

The Series I Units will pay fixed cumulative preferential distributions of $1.50 per Series I Unit per annum, yielding 6.00% per annum, payable on the last day of January, April, July and October of each year, as and when declared by the board of trustees of Artis, for the initial period ending on April 30, 2023. The first quarterly distribution, if declared, will be payable on April 30, 2018 and will be $0.3750 per Series I Unit, based on the anticipated closing date of the Financing on January 31, 2018. The distribution rate will be reset on April 30, 2023 and every five years thereafter at a rate equal to the greater of (i) the sum of the then five year Government of Canada bond yield and 3.93% and (ii) 6.00%. The Series I Units are redeemable by Artis, at its option, on April 30, 2023 and on April 30 of every fifth year thereafter.

Holders of Series I Units will have the right to reclassify all or any part of their Series I Units as Cumulative Floating Rate Preferred Trust Units, Series J (the “Series J Units”), subject to certain conditions, on April 30, 2023 and on April 30 of every fifth year thereafter. Such reclassification privilege may be subject to certain tax considerations (to be disclosed in the prospectus supplement for the Financing). Holders of Series J Units will be entitled to receive a floating cumulative preferential distribution, payable on the last day of January, April, July and October of each year, as and when declared by the board of trustees of Artis, at a rate equal to the sum of the then 90-day Government of Canada Treasury Bill yield plus a spread of 3.93%.

DBRS Limited has assigned a provisional rating of Pfd-3 (low) to the Series I Units.

The Financing is being made pursuant to the REIT’s base shelf prospectus dated August 8, 2016. The terms of the offering will be described in a prospectus supplement to be filed with Canadian securities regulators. The Financing is expected to close on or about January 31, 2018 and is subject to regulatory approval.

Artis intends to use the net proceeds from the Financing to redeem its existing U.S. dollar denominated cumulative redeemable preferred trust units, Series C and for general trust purposes.

They later announced:

that as a result of strong investor demand for its previously announced offering, the underwriters have exercised their option to increase the size of the offering to 5,000,000 Cumulative Minimum Rate Reset Preferred Trust Units, Series I (“Series I Units”) to be offered on a bought deal basis to a syndicate of underwriters led by TD Securities Inc., RBC Capital Markets and Scotiabank (collectively the “Underwriters”). The Series I Units will be issued at a price of $25.00 per unit, for gross proceeds of $125,000,000 (the “Financing”).

The Financing is being made pursuant to the REIT’s base shelf prospectus dated August 8, 2016. The terms of the offering will be described in a prospectus supplement to be filed with Canadian securities regulators. The Financing is expected to close on or about January 31, 2018 and is subject to regulatory approval.

Artis intends to use the net proceeds from the Financing to redeem its existing U.S. dollar denominated cumulative redeemable preferred trust units, Series C and for general trust purposes.

The issue they intend to redeem is AX.PR.U, a FixedReset, 5.25%+446 US PAY ROC announced 2012-09-11 which commenced trading 2012-9-18, and which is callable at par on 2018-3-31.

The new issue looks quite expensive to me, according to Implied Volatility Analysis:

Click for Big

This perceived richness has a different source than the other issues discussed here recently, such as the BEP.PR.M issue, the CM.PR.S issue and the NA.PR.E, since the calculated level of Implied Volatility, 11%, is actually quite reasonable.

In this case, the richness is due to the extraordinarily high value that retail – fighting the last war, as always – has placed on the minimum reset guarantee. If, like me, you consider the guarantee to have little or no value, you will expect the new issue to be trading near the price of AX.PR.A, which has an Issue Reset Spread of 406bp (and a current coupon of 5.662%). However, this issue closed today at 23.61, indicating that retail considers the minimum rate guarantee to be worth somewhere around $1.50. Wow! That’s nearly double the value of the call option in this analysis!

Brookfield Infrastructure has announced:

that it has agreed to issue 8,000,000 Cumulative Class A Preferred Limited Partnership Units, Series 9 (“Series 9 Preferred Units”) on a bought deal basis to a syndicate of underwriters led by CIBC Capital Markets, BMO Capital Markets, RBC Capital Markets, Scotiabank, and TD Securities Inc. The Series 9 Preferred Units will be issued at a price of $25.00 per unit, for gross proceeds of $200,000,000. Holders of the Series 9 Preferred Units will be entitled to receive a cumulative quarterly fixed distribution at a rate of 5.00% annually for the initial period ending March 31, 2023. Thereafter, the distribution rate will be reset every five years at a rate equal to the greater of: (i) the 5-year Government of Canada bond yield plus 3.00%, and (ii) 5.00%. The Series 9 Preferred Units are redeemable on or after March 31, 2023.

Holders of the Series 9 Preferred Units will have the right, at their option, to reclassify their Series 9 Preferred Units into Cumulative Class A Preferred Limited Partnership Units, Series 10 (“Series 10 Preferred Units”), subject to certain conditions, on March 31, 2023 and on March 31 every five years thereafter. Holders of Series 10 Preferred Units will be entitled to receive a cumulative quarterly floating distribution at a rate equal to the 90-day Canadian Treasury Bill yield plus 3.00%.

Brookfield Infrastructure has granted the underwriters an option, exercisable until 48 hours prior to closing, to purchase up to an additional 2,000,000 Series 9 Preferred Units which, if exercised, would increase the gross offering size to $250,000,000.

The Series 9 Preferred Units will be offered in all provinces and territories of Canada by way of a supplement to Brookfield Infrastructure’s existing short form base shelf prospectus.

Brookfield Infrastructure intends to use the net proceeds of the issue of the Series 9 Preferred Units to fund a growing backlog of committed organic growth capital expenditure projects and an active pipeline of new investment opportunities, and for general working capital purposes. The offering of Series 9 Preferred Units is expected to close on or about January 23, 2018.

This issue looks quite expensive to me, according to Implied Volatility Analysis:

Click for Big

Well, it’s starting to get monotonous, but we see in this chart many of the same features we saw when reviewing last week’s BEP issue, the CM issue and NA issue:

• The curve is very steep, with Implied Volatility equal to 40% (a ridiculously large figure), and
• The extant issues are trading relatively near to, or well above par

The ludicrously high figure of Implied Volatility is something I take to mean that the underlying assumption of the Black-Scholes model, that of no directionality of prices, is not accepted by the market; the market seems to be taking the view that since things seem rosy now, they will always be rosy and everything will trade near par in the future.

I balk at ascribing a 100% probability to this outcome. There may still be a few old geezers amongst the Assiduous Readers of this blog who can still (faintly) remember the Great Bear Market of 2014-16, in which quite a few similar assumptions made earlier turned out to be slightly inaccurate.

For the long term, I suggest that any change in the slope of the curve will be a flattening, with a very high degree of confidence. This will imply that the higher-spread issues will outperform the lower-spread issues.

All told, though, I have no hesitation in slapping an ‘Expensive’ label on this issue – according to the Implied Volatility analysis shown above, the theoretical price of the new issue is 23.50. Mind you, the Implied Volatility cap rate of 40% is arbitrary; perhaps if I allowed 50% or so the new issue would sit on the curve … but in that case, Implied Volatility has become a completely arbitrary meaningless number.

Brookfield Renewable Partners L.P. has announced:

that it has agreed to issue 8,000,000 Cumulative Minimum Rate Reset Class A Preferred Limited Partnership Units, Series 13 (the “Series 13 Preferred Units”) on a bought deal basis to a syndicate of underwriters led by TD Securities Inc., BMO Capital Markets, CIBC Capital Markets, RBC Capital Markets and Scotiabank for distribution to the public. The Series 13 Preferred Units will be issued at a price of $25.00 per unit, for gross proceeds of $200,000,000.

Holders of the Series 13 Preferred Units will be entitled to receive a cumulative quarterly fixed distribution yielding 5.00% annually for the initial period ending April 30, 2023. Thereafter, the distribution rate will be reset every five years at a rate equal to the greater of (i) the 5-year Government of Canada bond yield plus 3.00%, and (ii) 5.00%. The Series 13 Preferred Units are redeemable on April 30, 2023 and on each Series 13 Reclassification Date (as defined below) thereafter.

Holders of the Series 13 Preferred Units will have the right, at their option, to reclassify their Series 13 Preferred Units into Cumulative Floating Rate Reset Class A Preferred Limited Partnership Units, Series 14 (“Series 14 Preferred Units”), subject to certain conditions, on April 30, 2023 and on April 30 every 5 years thereafter (each a “Series 13 Reclassification Date”). Holders of Series 14 Preferred Units will be entitled to receive a cumulative quarterly floating distribution at a rate equal to the 90-day Canadian Treasury Bill yield plus 3.00%.

Brookfield Renewable has granted the underwriters an option, exercisable until 48 hours prior to closing, to purchase up to an additional 2,000,000 Series 13 Preferred Units which, if exercised, would increase the gross offering size to $250,000,000.

The Series 13 Preferred Units will be offered in all provinces and territories of Canada by way of a supplement to Brookfield Renewable’s existing Canadian short form base shelf prospectus. The Series 13 Preferred Units may not be offered or sold in the United States or to U.S. persons absent registration or an applicable exemption from the registration requirements under the U.S. Securities Act.

Brookfield Renewable intends to use the net proceeds of the issue of Series 13 Preferred Units to repay indebtedness. The offering of Series 13 Preferred Units is expected to close on or about January 16, 2018.

They later announced:

that as a result of strong investor demand for its previously announced offering, the underwriters have exercised their option to increase the size of the offering to 10,000,000 Cumulative Minimum Rate Reset Class A Preferred Limited Partnership Units, Series 13 (the “Series 13 Preferred Units”) to be offered on a bought deal basis to a syndicate of underwriters led by TD Securities Inc., BMO Capital Markets, CIBC Capital Markets, RBC Capital Markets and Scotiabank. The Series 13 Preferred Units will be issued at a price of $25.00 per unit, for gross proceeds of $250,000,000.

This issue looks quite expensive to me, but quantifying the degree of richness is difficult. According to Implied Volatility Analysis:

Click for Big

We see in this chart many of the same features we saw when reviewing the recent BPO new issue:

• The curve is very steep, with Implied Volatility equal to 40% (a ridiculously large figure), and
• Each of the extant issues is trading at a premium

The ludicrously high figure of Implied Volatility is something I take to mean that the underlying assumption of the Black-Scholes model, that of no directionality of prices, is not accepted by the market; in turn, I suggest that this reflects a rather touching faith that the existence of a minimum rate guarantee on reset also indicates that the issues will never, ever trade below par. There will be a lot of long faces when this test gets failed in the future!

However, for the long term, I suggest that any change in the slope of the curve will be a flattening, with a very high degree of confidence. This will imply that the higher-spread issues will outperform the lower-spread issues.

Complicating the above analysis is a high probability that the three extant issues will each be called at the first opportunity. I will certainly agree that this is likely to happen, but I balk at ascribing a 100% probability to this outcome. There may still be a few old geezers amongst the Assiduous Readers of this blog who can still (faintly) remember the Great Bear Market of 2014-16, in which quite a few similar assumptions made earlier turned out to be slightly inaccurate.

All told, though, I have no hesitation in slapping a ‘Very Expensive’ label on this issue.

Canoe EIT Income Fund has announced:

that it has filed and obtained a receipt for a final short form prospectus in respect of the previously announced offering of Cumulative Redeemable Series 1 Preferred Units (the “Series 1 Preferred Units”) at a price of $25.00 per Series 1 Preferred Unit (the “Offering”). The Series 1 Preferred Units were offered to the public through a syndicate of underwriters led by Scotiabank and RBC Capital Markets which also includes BMO Capital Markets, CIBC Capital Markets, National Bank Financial Inc., TD Securities Inc., Canaccord Genuity Corp., Industrial Alliance Securities Inc. and Manulife Securities Incorporated.

The Fund will issue and sell to the underwriters 4,900,000 Series 1 Preferred Units at a price of $25.00 per Series 1 Preferred Unit for total gross proceeds of the Offering of $122,500,000. The Fund has also granted the underwriters an option, exercisable at the offering price for a period of 30 days from the closing of the Offering, to purchase up to an additional 735,000 Series 1 Preferred Units to cover over-allotments, if any. The quarterly cumulative preferential cash distributions on the Series 1 Preferred Units will be 4.80% per annum. The Toronto Stock Exchange has conditionally approved the listing of the Series 1 Preferred Units under the symbol EIT.PR.A. The closing of the Offering is expected to occur on or about March 14, 2017.

The proceeds from the Offering will be invested by the Fund in accordance with its investment objectives and strategies. The Offering is expected to ensure the sustainability of the Fund by increasing the earning capacity of the units. The Series 1 Preferred Units are provisionally rated Pfd – 2 (high) by Dominion Bond Rating Service Limited.

Full details are available in the prospectus, to which I am not permitted to link because Canadian Securities Administrators take the view that you are all stupid, filthy, ignorant investor scum and do not deserve the slightest consideration whatsoever. You will have to go to SEDAR and look for “Canoe EIT Income Fund Mar 8 2017 14:21:01 ET Final short form prospectus – English PDF 266 K”.

On and after March 15, 2022, the Fund may redeem all or from time to time any part of the outstanding Series 1 Preferred Units, at the Fund’s option, at a price per Series 1 Preferred Unit equal to $25.75 if redeemed on or after March 15, 2022, but before March 15, 2023; $25.50 if redeemed on or after March 15, 2023, but before March 15, 2024; and $25.00 thereafter, together, in each case, with all accrued and unpaid distributions up to but excluding the date fixed for redemption. On or after March 15, 2024, the Series 1 Preferred Units will be retractable for cash, at the option of the holder, for $25.00 per Series 1 Preferred Unit, together with any accrued and unpaid distribution in respect of such Series 1 Preferred Units, less any tax required by law to be deducted therefrom, by notice by the holder of the Series 1 Preferred Units (“Series 1 Preferred Unitholders”) to be retracted delivered to the Manager not less than 30 days prior to the applicable retraction date. Certain other provisions relating to the Series 1 Preferred Units are summarized under “Description of the Preferred Units”

The distributions are not expected be entirely eligible dividends:

Distributions in any given period may consist of net income, net capital gains and/or returns of capital. The Fund’s income and net taxable gains for the purposes of the Tax Act will be allocated to the holders of Units and Series 1 Preferred Units in the same proportion as the distributions received by such holders. See “Principal Canadian Federal Income Tax Considerations”.

The recent historical composition of the fund’s distributions is provided in the prospectus and was reproduced in the previous post regarding this issue. I am taking the view that expected distributions will ultimately be taxed at a rate reasonably close to eligible dividends, so for analytical purposes I have recorded the issue as paying dividends.

Canoe EIT Income Fund has announced:

that it has filed and obtained a receipt for a preliminary short form prospectus in respect of a potential offering of Cumulative Redeemable Series 1 Preferred Units (the “Series 1 Preferred Units”) at a price of $25.00 per Series 1 Preferred Unit (the “Offering”). The Series 1 Preferred Units will be offered to the public through a syndicate of underwriters led by Scotiabank and RBC Capital Markets which also includes BMO Capital Markets, CIBC Capital Markets, National Bank Financial Inc., TD Securities Inc., Canaccord Genuity Corp., Industrial Alliance Securities Inc. and Manulife Securities Incorporated. Canoe Financial LP, the manager of the Fund, believes that successful completion of the Offering will provide the Fund with longer-term fixed rate capital at an attractive all in cost of financing. The additional capital will be used to take advantage of attractive investment opportunities, and is also expected to ensure the sustainability of the Fund by increasing the earning capacity of the Units. The Series 1 Preferred Units are provisionally rated Pfd – 2 (high) by Dominion Bond Rating Service Limited.

The Fund’s regular monthly distribution of $0.10 per unit for unitholders of EIT.UN units remains unchanged. The Fund has maintained the $0.10 per unit monthly distribution since August 2009, through varying market conditions.

The Fund’s annual voluntary redemption feature for unitholders of EIT.UN units remains unchanged. Once a date has been set for the 2017 annual redemption, the Fund will issue a news release with the details.

A preliminary short form prospectus containing important information relating to the Series 1 Preferred Units has been filed with securities commissions or similar authorities in all provinces and territories of Canada. The preliminary short form prospectus is still subject to completion or amendment. Copies of the preliminary short form prospectus may be obtained from your registered financial advisor using the contact information for such advisor, or from representatives of the underwriters listed above. There will not be any sale or any acceptance of an offer to buy the Series 1 Preferred Units until a receipt for the final short form prospectus has been issued.

The preliminary prospectus is on SEDAR, but Canadian Regulatory Authorities have determined in their infinite wisdom that nasty investor scum may not link directly to it. Instead, one must search for “Canoe EIT Income Fund Feb 17 2017 16:18:30 ET Preliminary short form prospectus – English PDF 335 K”

The investment objectives of the Fund are to maximize monthly distributions relative to risk and maximize Net Asset Value, while maintaining and expanding a diversified investment portfolio, primarily through acquiring, investing, holding, transferring, disposing of or otherwise dealing with or in equity and debt securities of corporations, partnerships, or other issuers and such other investments as the Manager may determine in its sole discretion from time to time. The investment objectives set forth above may be achieved through direct acquisitions, investments or, at the election of the Manager, through “exchange offers” or rights offerings completed by the Fund from time to time.
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Set out below are the tax classifications of the historical distributions of the Fund (which were $0.10 per Unit per month for the entire period presented) for the past five years and the Manager expects the Series 1 Preferred Units to have a similar distribution breakdown:

%	2015	2014	2013	2012	2011
Capital gain	60.92%	59.89%	32.73%	32.82%
Actual amount of eligible dividends	9.29%	5.33%	18.18%	32.25%	16.73%
Actual amount of ineligible dividends
Foreign income, net of tax					17.28%
Other income				1.49%
Return of Capital(1)	29.79%	34.78%	49.09%	66.26%	33.17%
Total	100.00%	100.00%	100.00%	100.00%	100.00%

(1) Includes warrants from 2012-2016

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Certain Provisions of the Series 1 Preferred Units

Distributions

Series 1 Preferred Unitholders will be entitled to receive quarterly cumulative preferential cash distributions on the 15th day of March, June, September and December of each year at a rate of ●% per annum of the issue price of a Series 1 Preferred Unit ($● per Series 1 Preferred Unit per annum or $● per Series 1 Preferred Unit per quarter), less any tax required by law to be deducted therefrom. The initial distribution, if declared, will be payable on June 15, 2017 and will be $● per Series 1 Preferred Unit, assuming a closing date of ●, 2017. Distributions in any given period may consist of net income, net capital gains and/or returns of capital. The Fund’s income and net taxable gains for the purposes of the Tax Act will be allocated to the holders of Units and Series 1 Preferred Units in the same proportion as the distributions received by such holders. See “Principal Canadian Federal Income Tax Considerations”.

Redemption at the Option of the Fund

Prior to March 15, 2022, the Fund may not redeem any Series 1 Preferred Units. On or after March 15, 2022, the Fund may give notice in writing not less than 30 days nor more than 60 days prior to the applicable redemption date of its intention to redeem for cash the Series 1 Preferred Units in whole or in part, at the Fund’s option, at a price per Series 1 Preferred Unit equal to $25.75 if redeemed on or after March 15, 2022, but before March 15, 2023; $25.50 if redeemed on or after March 15, 2023, but before March 15, 2024; and $25.00 thereafter, together, in each case, with all accrued and unpaid distributions up to but excluding the date fixed for redemption and less any tax required by law to be deducted therefrom.

If less than all outstanding Series 1 Preferred Units are at any time to be redeemed, the particular Series 1 Preferred Units to be redeemed will be selected on a pro rata basis (disregarding fractions) or in such other manner as the Trustee in its discretion may, by resolution, determine.

Retraction by Series 1 Preferred Unitholders

Prior to March 15, 2024, a Series 1 Preferred Unitholder may not require the Fund to retract any Series 1 Preferred Units. Subject to the provisions of any equity securities of the Fund ranking prior to or pari passu with the Series 1 Preferred Units, and to the provisions described under “− Restrictions on Distributions and Retirement and Issue of Series 1 Preferred Units”, a Series 1 Preferred Unitholder may require the Fund to retract such Series 1 Preferred Units (by delivering notice to the Manager of the intention to have Series 1 Preferred Units retracted not less than 30 days prior to the applicable retraction date) on or after March 15, 2024 for a cash price of $25.00, together with any accrued and unpaid distributions up to but excluding the date of retraction and less any tax required by law to be deducted therefrom.

Purchase for Cancellation

Subject to applicable law, including the requirements in NI 81-102, the provisions of any equity securities of the Fund ranking prior to or pari passu with the Series 1 Preferred Units, and to the provisions described under “− Restrictions on Distributions and Retirement and Issue of Series 1 Preferred Units”, the Fund may at any time purchase for cancellation the whole or any part of the Series 1 Preferred Units outstanding from time to time, in the open market through or from an investment dealer or any firm holding membership on a recognized stock exchange, or by private agreement or otherwise, at the lowest price or prices at which, in the opinion of the Manager of the Fund, such Series 1 Preferred Units are obtainable.
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Rating

The Series 1 Preferred Units are provisionally rated Pfd-2(high) by Dominion Bond Rating Service Limited (“DBRS”).