Brookfield Office Properties has announced (but not on their website yet, as far as I can tell given their idiotic, but ever-so-cool website design):
Brookfield Office Properties Inc., a subsidiary of Brookfield Property Partners L.P., announced today that it has agreed to issue to a syndicate of underwriters led by Scotiabank, CIBC Capital Markets, RBC Capital Markets and TD Securities Inc. for distribution to the public, eight million Cumulative Minimum Rate Reset Class AAA Preference Shares, Series EE (the “Preferred Shares, Series EE”). The Preferred Shares, Series EE will be issued at a price of C$25.00 per share, for aggregate proceeds of C$200 million. Holders of the Preferred Shares, Series EE will be entitled to receive a cumulative quarterly fixed dividend yielding 5.10% annually for the initial period ending March 31, 2022. Thereafter, the dividend rate will be reset every five years at a rate equal to the greater of (i) the five-year Government of Canada bond yield plus 3.96% and (ii) 5.10%.
Holders of Preferred Shares, Series EE will have the right, at their option, to convert their shares into Cumulative Floating Rate Class AAA Preference Shares, Series FF (the “Preferred Shares, Series FF”), subject to certain conditions, on March 31, 2022 and on March 31 every five years thereafter. Holders of Preferred Shares, Series FF will be entitled to receive cumulative quarterly floating dividends at a rate equal to the 90-day Government of Canada Treasury Bill yield plus 3.96%.
The Series EE Shares and Series FF Shares will be fully and unconditionally guaranteed, jointly and severally, as to: (i) the payment of dividends, as and when declared, (ii) the payment of amounts due on redemption, and (iii) the payment of amounts due on the liquidation, dissolution or winding-up of the Corporation, by the following entities: Brookfield Property Partners L.P., Brookfield Property L.P., Brookfield BPY Holdings Inc., Brookfield BPY Retail Holdings II Inc., BPY Bermuda Holdings Limited, BPY Bermuda Holdings II Limited, BPY Bermuda Holdings IV Limited and BPY Bermuda Holdings V Limited.
Brookfield Office Properties has granted the underwriters an option, exercisable in whole or in part anytime up to two business days prior to closing, to purchase an additional 2,000,000 Preferred Shares, Series EE at the same offering price. Should the option be fully exercised, the total gross proceeds of the financing will be C$250 million.
The Preferred Shares, Series EE will be offered in all provinces of Canada by way of a supplement to Brookfield Office Properties’ existing Canadian short form base shelf prospectus dated August 29, 2016.
The net proceeds of the issue will be used by Brookfield Office Properties for general corporate purposes which may include the redemption of existing preferred shares. The offering is expected to close on or about February 17, 2017.
They later announced:
Brookfield Office Properties Inc., a subsidiary of Brookfield Property Partners L.P., announced today that as a result of strong investor demand for its previously announced offering it has agreed to increase the size of the offering to eleven million Cumulative Minimum Rate Reset Class AAA Preference Shares, Series EE (the “Preferred Shares, Series EE”). The Preferred Shares, Series EE will be issued at a price of C$25.00 per share, for aggregate proceeds of C$275 million. There will not be an underwriters’ option. The Preferred Shares, Series EE are being offered on a bought deal basis by a syndicate of underwriters led by Scotiabank, CIBC Capital Markets, RBC Capital Markets and TD Securities Inc.
Holders of the Preferred Shares, Series EE will be entitled to receive a cumulative quarterly fixed dividend yielding 5.10% annually for the initial period ending March 31, 2022. Thereafter, the dividend rate will be reset every five years at a rate equal to the greater of (i) the five-year Government of Canada bond yield plus 3.96% and (ii) 5.10%.
Holders of Preferred Shares, Series EE will have the right, at their option, to convert their shares into Cumulative Floating Rate Class AAA Preference Shares, Series FF (the “Preferred Shares, Series FF”), subject to certain conditions, on March 31, 2022 and on March 31 every five years thereafter. Holders of Preferred Shares, Series FF will be entitled to receive cumulative quarterly floating dividends at a rate equal to the 90-day Government of Canada Treasury Bill yield plus 3.96%.
The Series EE Shares and Series FF Shares will be fully and unconditionally guaranteed, jointly and severally, as to: (i) the payment of dividends, as and when declared, (ii) the payment of amounts due on redemption, and (iii) the payment of amounts due on the liquidation, dissolution or winding-up of the Corporation, by the following entities: Brookfield Property Partners L.P., Brookfield Property L.P., Brookfield BPY Holdings Inc., Brookfield BPY Retail Holdings II Inc., BPY Bermuda Holdings Limited, BPY Bermuda Holdings II Limited, BPY Bermuda Holdings IV Limited and BPY Bermuda Holdings V Limited.
The Preferred Shares, Series EE will be offered in all provinces of Canada by way of a supplement to Brookfield Office Properties’ existing Canadian short form base shelf prospectus dated August 29, 2016.
The net proceeds of the issue will be used by Brookfield Office Properties for general corporate purposes which may include the redemption of existing preferred shares. The offering is expected to close on or about February 17, 2017.
Implied volatility analysis indicates:
Click for Big
So according to that, the new issue is a little expensive and should have had a coupon of more like 5.25%, but that depends on how much value you accord the minimum rate guarantee. I value it as zero!
Note the bottom line …
I guess they’ll buy their other preferreds at a discount (ie bpo-pn can be bought at 80% of face).. thus improving their bottom line.
James,
“… but that depends on how much value you accord the minimum rate guarantee. I value it as zero!”
Come on! I guess you mean by that that you CURRENTLY do not give much value to this feature given your conviction that interest rates will go up in the upcoming years (what we have been hearing for a quite a while now)?
Well there is still a risk that they go lower as they were not so long ago. However big or small is that risk is another story. I very much like the feature because it allows one to budget a minimum of certain income in “the perpetuity scenario” of the issue. It does also clarify and give comfort to what would happen if interest rates were to turn negative.
It is worth something…
… This being said, I did not subscribe the issue either in light of Mr. Market’s then valueing of the other BPO issues. My thoughts were at the time that should that new issue go down at say $24.75 or below when it will start trading that I will by some on the secondary market. Had I known your assessment that the proposed minum rate / rate reset formula is only worth 15 bps more than the value of its comparables without the minimum reset guarantee, I would have subscribed some at $25.
I would be curious to know by how much Mr. Market value that Minimum rate “privilege” on other issues such as, for instance, CU.PR.I or BEP.PR using your calculations. I believe it must be far more than ust 15 bps.
sometimes I just feel compelled to add my two cents worth…
I also gave this new BPO issue a miss – mostly on the basis that for about the same price ($25.15) I could buy BIP.pr.D which is paying only a slightly lower dividend at 5.0% +3.78% but is an investment grade (2L) pref.
I also think the minimum reset is almost worthless. Here’s my thinking (if I’m wrong will someone please correct me):
If interest rates went up over the next five years (to say 8%) then obviously the minimum no longer applies – and if interest rates went down (to say negative two percent) then BPO would NOT renew this pref at 5.1% – BPO would simply redeem the pref at $25 and reissue a new one at the lower prevailing market rates
I like the minimum feature. Without the minimum, if interest rates drop, then the coupon can be severely cut.
I’m now the proud owner of a full stable of low spread resets that were swell when purchased at PAR, and now their coupons have been reset to about half, along with the market price. Great for those who want to buy in now for capital appreciation, not so much for me. Huge capital loss if I sell, so while I wait, I live with ~2% coupons. Terrible investment. At least with perpetuals I would still be receiving the original coupon, or with high spread resets I would have received my $25 back to invest elsewhere.
Wouldn’t I have been protected if there had been a minimum reset on those shares? That ain’t worth zero.
I see what you’re saying like_to_retire… if interest rates are lower in five years and there was no minimum reset feature then BPO could just reset at a lower rate and we’d be hit with lower divs and a capital loss (vs. with the minimum reset we would probably get our $25 back if interest rates drop).
I think that a big factor in your situation above is that you own resets with very low spreads by today’s standards. If those old resets had high spreads then they wouldn’t have dived down to the low values we see today. The new issues coming out, such as this BPO at +3.96%, have high spreads on a historical basis – thus when they reset in the future it should be at a reasonable dividend (compared to other fixed reset prefs in the market at that time) , even if interest rates are low – thus even without the minimum feature I don’t think there’s a big risk of the share price diving down in the future. I suppose the one situation that would lead to a future drop in share price would be if reset spreads went even higher than the current 4% level, so the minimum reset feature does offer protection in that situation.
I’m still trying to get my head around this – other comments would be appreciated!
But Brian, James has recommended low spreads and poo-pooed high spread varieties for quite some time in PreLetter, and I bought into a lot of the low spreads. I’m still waiting for my payoff. So far, it isn’t in capital appreciation and all my coupons are now painfully small.
It’s a capital trap you can’t get out of. Darned if you hold on, and darned if you don’t. The non-minimum, low spread resets were a lot riskier than I gave them credit for. There is risk in both share price and coupon. Not so with perpetuals or resets with minimums.
I’m sure James has spent many nights lamenting the fact that he didn’t see the 2015 reset market collapse coming. I too lost a bundle on my low spread resets in 2015. Fortunately, I bought even more of them a year ago – a bit foolish from a risk concentration perspective but I’m smiling now.
I’ve now sold off the bulk of my resets but the ones I’ve kept are all low spreads because I think they’ll have the highest long term returns with their eventual capital appreciation (and because I still have some faith in James’ prognostications!).
Mostly these days I’m buying all I can of the new bank resets – they’re a good credit risk and with their high spreads the chance of future capital losses is quite small (and yes, that risk would be reduced even more if the banks offered minimum resets but you can’t have everything!). Returns won’t be spectacular but I’m sleeping well at night.
Yeah, the return on the low spreads has been good over the last while, but it doesn’t come near making up the capital losses yet. I did consider doubling down a year ago, but decided I’d been punished enough.
If there is sufficient capital gain in the next few years, I will consider replacing my existing allocation of prefs to ones with a minimum reset feature.
Brian,
I do hope like_to_retire was able to convince you that the minimum reset feature is worth something. What you seem to miss is that “More than +300 bps” was also previously considered a high spead at the time prefs were issued at $25. such as NPI.PR.A (a lower credit than BPO but not by much IIRC). Still it did not prevent that pref to go as low as $12 where I was happy to buy them. They are now back to $18, which is good but still well below the $25 their subscribers paid for them. Most if not all of these capital losses would have been avoided had these earlier issues been subject to a floor.
In an environment where Canadas 5 years give 0.75%, +396bps may seem quite a lot but it will be not enough if say, in 5 years, interest down again to even as low as say 0.1%. By then, assuming no change of BP0’s credit rating in the meantime, BPO would have to re-issue new one, still giving 5.10% at a reset rate of +500 bps without redeeming what you just bought. In that scenario, but for their minimum, your BPO resetable will then be only worth approx. $20 on the market as they would by then reset at 4.06% (that is 0.1% + 396bps).
The minimum rate guarantee is an option, so it has some theoretical value; however, the value of this option is trumped by the value of the issuer’s option to redeem the shares. If your “minimum rate guarantee” option becomes too valuable, the company will take it away from you by redeeming the shares, and issue something cheaper. The only “perpetuity scenario” is when you don’t want it.
In simplest terms, the issuer’s option to redeem always leaves the investor who bought at $25 feeling disappointed. If the security is redeemed, it means you need to replace it at a lower rate, if it is not redeemed, it means you are probably in a capital loss position.
I’m with James. At current market levels, I think this feature provides a false sense of security and is not worth including in the valuation. Of course, that won’t stop some investors from loving the “minimum rate guarantee” issues. Going back in time, fixed resets also provided a sense of security by insulating investors from changes in the GOC, which at the time was the nemesis of investors in fixed dividend perpetuals. We all know how that has turned out (at least so far).
It’s disappointing that some seem to feel that James’ opinions and analysis are somehow responsible for them losing money on low spread fixed resets. That’s complete BS. James’ analysis and recommendations are always well grounded in research and logic. That’s what’s going to work over the long run. In the short run, the market does illogical things based on fear and poor liquidity.
We are all responsible for our own investment decisions. Any investor who has read prefblog or prefletter has benefited from: 1) the information and educational material they contain; 2) James’ powerful analysis; and 3) having a forum for sharing ideas about the obscure Canadian preferred share market. Further, all preferred investors have benefited from James’ shareholder advocacy. Thanks James!
No one is disparaging James opinions here LD. It’s a discussion among pref owners who know full well they’re responsible for their investment decisions. No one here needs a scolding from you, and James doesn’t need defending.