PrefBlog

DBRS Limited has announced:

that, effective January 1, 2022, Real Estate & E-Commerce Split Corp. changed its name to Real Estate Split Corp.

DBRS Morningstar has also downgraded its rating on the Preferred Shares issued by Real Estate Split Corp. (the Company) to Pfd-3 (high) from Pfd-2 (low). The Preferred Shares have experienced a considerable reduction in downside protection since February 2022 as a result of the decline in the net asset value (NAV) of the portfolio in response to the broad stock market sell-off, which was triggered by the mix of the global high inflationary environment, tighter monetary policies, and various geopolitical events, such as the Russia-Ukraine war.

Considering a deterioration in downside protection (to 54.8% in November 2022 from 64.2% in November 2021), together with the increase in Class A shares distribution (to 10.4% on the original issue price of $15.0 from 8.0% in September 2021), the amount of grind present (6.8% per year over the remaining term), and the foreign-exchange risk exposure, DBRS Morningstar downgraded the rating on the Preferred Shares to Pfd-3 (high) from Pfd-2 (low).

The Company invests in a diversified portfolio composed of approximately 19 real estate issuers (the Portfolio) operating in the real estate or related sectors, including real estate investment trusts. The Portfolio may include securities denominated in currencies other than the Canadian dollar, exposing the Preferred Shares to foreign currency risk. The Company takes a tactical approach to determine whether to hedge the exposure to foreign currencies. The Company is managed by Middlefield Limited (the Manager).

Holders of the Preferred Shares receive quarterly fixed cumulative preferential cash distributions of $0.13125 (or $0.525 annually) per share, representing a 5.25% per-annum return on the original issue price of $10.00. The fixed distributions of dividends on the Preferred Shares are funded from the dividends received on the securities in the Portfolio, which cover approximately 1.4 times the annual Preferred Shares distributions. Holders of the Class A Shares receive regular monthly noncumulative distributions targeted to be $0.13 (or $1.56 annually) per Class A Share to yield 10.4% per annum on the original issue price of $15.00. Distributions to the Class A Shares were increased from the initial amount of $0.10 (or $1.20 annually) per Class A Share as of September 15, 2021. The Class A Share distributions are subject to the asset coverage test, which does not permit any distributions to holders of the Class A Shares if the Company’s NAV falls below $15.00 or if the dividends of the Preferred Shares are in arrears.

As of November 2, 2022, the downside protection available to the Preferred Shares was approximately 54.8%. Regular distributions to holders of the Class A Shares are projected to cause an average annual portfolio grind of about 6.8% over the remaining term. To supplement Portfolio income, the Manager may engage in covered call option writing on all, or a portion of the securities held in the Portfolio, engage in securities lending, or rely on realized capital gains.

The Company established a loan facility for working capital purposes, with the maximum amount of 5% of the total assets of the Company. The Company may pledge the Portfolio securities as collateral for amounts borrowed under the loan facility.

Recent Updates/Treasury Offerings

(i) On February 9, 2022
The company completed an overnight treasury offering of Class A Shares and Preferred Shares, raising approximately $16.3 million in gross proceeds. The Class A Shares were offered at a price of $19.10 per share for a distribution rate of 8.2% on the issue price, and the Preferred Shares were offered at a price of $10.55 per share for a yield to maturity of 5.0%.

(ii) On May 12, 2022
The company completed an overnight treasury offering of Class A Shares and Preferred Shares, raising approximately $15.2 million in gross proceeds. The Class A Shares were offered at a price of $18.00 per share for a distribution rate of 8.7% on the issue price, and the Preferred Shares were offered at a price of $10.10 per share for a yield to maturity of 5.2%.

(iii) On June 29, 2022
The company completed an overnight treasury offering of Class A Shares and Preferred Shares, raising approximately $10.1 million in gross proceeds. The Class A Shares were offered at a price of $15.30 per share for a distribution rate of 10.2% on the issue price, and the Preferred Shares were offered at a price of $10.12 per share for a yield to maturity of 5.2%.

(iv) On October 12, 2022
The company completed an overnight treasury offering of Class A Shares and Preferred Shares, raising approximately $11.8 million in gross proceeds. The Class A Shares were offered at a price of $14.40 per share for a distribution rate of 10.8% on the issue price, and the Preferred Shares were offered at a price of $9.80 per share for a yield to maturity of 5.4%.

A limited number of Class M Shares that rank junior to the Preferred Shares and Class A Shares in respect of capital upon the dissolution, winding up, or liquidation of the Company have been issued by the Company. There are currently $10 worth of such shares outstanding. The Class M Shares are not entitled to receive any dividends for as long as any Preferred Shares or Class A Shares are outstanding. Furthermore, no additional Class M Shares can be issued until the Preferred Shares and the Class A Shares have been retracted, redeemed, or purchased for cancellation.

The maturity date for both classes of shares is December 31, 2025. On maturity, the holders of the Preferred Shares will be entitled to the value of the Portfolio up to the face value of the Preferred Shares and any accrued but unpaid dividends in priority to the holders of the Class A Shares and the Class M Shares.

The main constraints to the rating are the following:

(1) Market fluctuations resulting from high inflation, interest rate hikes, oil prices, and global supply chain issues could further affect the Company’s NAV. The downside protection available to holders of the Preferred Shares depends on the value of the common shares held in the Portfolio.

(2) Volatility of price and changes in the dividend policies of the underlying issuers may result in significant reductions in the Preferred Shares dividend coverage or downside protection from time to time.

(3) Reliance on the manager to generate a high yield on the investment portfolio to meet distributions and other trust expenses without having to liquidate portfolio securities.

(4) The high concentration of the Portfolio in one industry (Real Estate).

(5) Potential foreign-exchange risk because the income received on the Portfolio is not hedged all the time.

The affected issue is RS.PR.A

This entry was posted on Tuesday, November 8th, 2022 at 8:53 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.