23 Responses to “August 21, 2023”

1. stusclues says:

   August 23, 2023 at 8:30 am

   “At this rate, yields on preferreds shares are gonna be calculated as undefined over nuthin’!”

   Where are the animal spirits? At yesterday’s closing prices and the 5 year at 4.123%:

   – BPO.PR.R will reset at 18.5% in 2026
   – TRP.PR.C will reset at 13.8% in 2026
   – BN.PR.R will reset at 12.4% in 2026
   – CF.PR.A will reset at 14.9% in 2026
   – INE.PR.A will reset at 13.8% in 2026

   Really?

2. Nestor says:

   August 23, 2023 at 10:00 am

   apparently, the market believes rates are going to zero again soon.
   i disagree of course… floaters and fixed resets are the way to go for me. stagger the reset dates of your fixed resets, sprinkle a few floaters in there and you’re good to go .

3. stusclues says:

   August 23, 2023 at 10:08 am

   “apparently, the market believes rates are going to zero again soon”

   Even if that is true (I don’t think so), subtract 4.123% from those resets and we still get incredible yields in a zero rate environment.

4. stusclues says:

   August 23, 2023 at 10:15 am

   “subtract 4.123% from those resets”

   Nope. Brain cramp. Math doesn’t work like that. Resets are still high though and point is still valid.

5. Nestor says:

   August 23, 2023 at 10:51 am

   any way you slice it right now, it pays to own prefs.
   if the 5 year settles around 3-3.5% over the next two years, the returns are still incredible. i dont’ think we’re going anywhere near 1/2% for the 5 year again.

6. Uub says:

   August 23, 2023 at 12:04 pm

   Nobody wants pref shares or high yielding stocks. Even on across the curve bond rally day like today (Aug 23) they are hitting the bid. All the focus on NVDA and big tech.. up 30%+ YTD!

   BPO is getting more distressed. So much debt and neg FFO can they even make it past 2023? What are the “smart” guys over at Brookfield doing? They could very well be the black swan that will surprise the market.

7. peet says:

   August 23, 2023 at 12:14 pm

   A propos Nestor’s and Stuclues’ posts:

   I have a spreadsheet containing 34 reset issues spread out over the next 5 years but with a concentration in 2024 and 2025. The portfolio is an average of P2-, so it also has P3+’s.

   It is set up such that with one cell entry I can play with 5-year GOC assumptions and thereby calculate all the resulting implied yields at the next reset (always assuming current pricing).

   I find the results “encouraging”:

   at current GOC: implied yield (aggregated) is 10.08%
   at GOC of 3.5%: 9.09%
   at GOC of 3%: 8.39%
   at GOC of 2.5%: 7.68%
   at GOC of 2%: 6.98%
   at GOC of 1.5%: 5.57%

8. stusclues says:

   August 23, 2023 at 12:39 pm

   “BPO is getting more distressed.”

   BPO doesn’t exist anymore. It was taken private by Brookfield and is part of BPY now. The preferred shares listed as BPO.PR.* are guaranteed by BPY. BPY is not distressed.

9. Nestor says:

   August 23, 2023 at 2:32 pm

   “Nobody wants pref shares or high yielding stocks.”

   welcome to 1999….

10. stusclues says:

    August 26, 2023 at 9:49 am

    This is definitely relevant to the conversation.

    BusinessWire
    UNITE HERE launched a new website, http://www.BrookfieldRealEstateWoes.org, on August 24, 2023, as a resource for regulators, members of the public, and other stakeholders who may be concerned about the dozens of headlines affiliates of Brookfield (NYSE: BN) have garnered this year about defaults, debt downgrades, and other commercial real estate distress.

11. Uub says:

    August 26, 2023 at 12:43 pm

    Thanks for sharing that. There is increasing attention and articles on woes of Brookfield/BPY, including one recently from The Real Deal. That should make investors in anything BN (not just the most obvious in BPY/BPO) nervous, no? The market surely is as they’ve been discounting BN/BAM and their subs for a long time now. Makes you wonder how really bad things are is under the cover despite the rosy spin from Flatt & his minions…

    What I mean by BPO distress is that their stocks are clearly a reflection of the distressed and soon to be dire situation for their office properties and CRE holdings as a whole. Securities trading well < 60c on par is clearly the market saying the underlying co is in distress. They haven't done much with their Var debt, their defaults are racking up in the $bils and their properties including "core" are declining in vacancy, value. BPO and BN should probably be a top market short and I predict they will be the next big domino to fall soon.

12. stusclues says:

    August 26, 2023 at 1:35 pm

    “Securities trading well < 60c on par is clearly the market saying the underlying co is in distress."

    Brookfield bonds don't trade a distressed levels. Look them up. For example, BPY4827770, a 2026 5.75% coupon has a last trade price of $92.50.

    The pricing on the BPO FR preferred shares largely reflects the overall depressed state of the FR market, with some extra issuer risk reflected.

13. DR says:

    August 27, 2023 at 8:54 am

    i too own some bpo.n and r but don’t kid yourself and read the financials

    as pref holder i can at times ignore taking a deeper look at the equity on the basis that i don’t care what the equity does so long as it doesn’t go to zero but did deeper dive into bpo

    two things:

    1) very much generalizing but a typical capital structure might be 50% debt, 5% prefs, 45% equity and thus my attitude that in most cases, equity can take a huge hit without impairing prefs. in BPY’s case, you are looking at approx 60%, 30%, 10% so the prefs are very much in danger to equity losses

    2) despite the countless opportunities to term out debt when long rates were near zero, these bozos remaining almost entirely variable (yet the parent BN had termed out most of their corp debt. made no sense but is true and a serious problem in the short run so long as curve remains as it is now).

    the net result is BPY is very much cash flow negative given surge in interest expense. AND that is despite occupancy staying elevated. should occupancy dip will only get much worse

    also buggers at BN decided to step up SG&A imposed on BPY. its up 50% despite assets up 10% over past 6 months

14. DR says:

    August 27, 2023 at 9:02 am

    stusclues,

    even by your bond example that puts a ytm well into the 8% range. this when the cap rate on the portfolio is markedly lower than that. borrowing costs in excess of returns is not a recipe for success.

    but i would tend to agree that the debt will be fine at is less than 60% of the capital structure. equity losses in excess of 10% which seem a fait accompli in this environment for commercial real estate will very much dip into the prefs

15. skeptical says:

    August 27, 2023 at 9:10 am

    How are the third party institutional investors a part of this mix?
    All the pension funds and sovereign funds that invest alongside Brookfield, what is their contribution in the asset/liability mix? Do they get a stake in project and then run independent from there?
    How much of BPO woes would trickle/gush upwards to BN?

16. niagara says:

    August 28, 2023 at 6:37 am

    If the market was truly concerned about Brookfield’s (i.e. the mother ship) credit worthiness, BN stock price would have cratered. It has not. BN common stock has essentially traded sideways during 2023. Credit concerns should always hit common equity first since the shareholders are first in line to take losses in a credit event.

    The decline in many BN pref issues is, IMOS, simple another example of the illogic that seems to pervade pref share pricing theses days. While I don’t enjoy seeing negative unrealized m2ms in my portfolio, the 7%+ dividend rates are for all of the issues that I hold rather comforting. So I don’t complain and clip my divvys. This will eventually correct and I am not worried about the dividends being paid.

17. Brassens says:

    August 28, 2023 at 7:24 am

    Little side question: What is the term you use to name the result of the formula that is :
    (Reset rate *( par price/current price)). Ex: BN.PR.R (2.3*(25/12.87))= 4.47
    Do you even use that data to judge shares?
    Cheers

18. stusclues says:

    August 28, 2023 at 9:08 am

    “The decline in many BN pref issues is, IMOS, simple another example of the illogic that seems to pervade pref share pricing theses days.”

    I agree, with some extra nervousness surrounding the real estate business mixed in, especially with the BPO series.

    BN is forecast (by BN in June) to generate $35B in FCF over the next 5 years. The consolidated enterprise is profitable and earnings are set to grow at a CAGR of 20% over this same period (again by BN in June). Strong opinions on the demise of the organization are not supported by the equity price (per niagra) nor by prices for the long term debt. Prefs are in the middle, lending support to the idea that low prices are mostly due to depressed overall state of the market.

    Also underappreciated, I think, is that BPY is a 100% owned subsidiary. The balance sheet of this entity is whatever the parent (BN) wants it to be. Like all companies with subsidiaries BN can (and I argue, will) support the subsidiary by absorbing any losses, possibly by injecting more equity, or other pursuing other corporate level solutions. It is very hard to argue that it is in BN’s interest to let BPY fail, especially given that many of the key issues challenging the subsidiary are transient (like lower occupancy driven by work from home).

19. DR says:

    August 28, 2023 at 11:27 am

    BN is indeed an example of what I would consider a normal capital structue where there is a mountain of equity behind the prefs and they do not have a variable debt problem as had termed out.

    BPY however is straight out of the GFC, lever up as much as possible and suck all the equity out over time. Add variable rate exposure and possibly a structural shift in demand for offices. BN might “prevent it from failing” as you say for a period in hopes of variable rate relief over time and to prevent an irreparable hit to their reputation and franchise but to think they will throw good money after bad forever is naiive. They chose to lever it up as much as possible and suck all the equity out as they could and gorge on SG&A.

    as said own some. prefer the lowest price issue (n’s) for added protection in event of reorg as get both highest reset yield and lowest price in same package

20. Avoid the Herd says:

    August 29, 2023 at 9:27 pm

    DR, not sure where you get the 60 / 30 / 10 split.

    As reported in latest (Q2) financials.
    Total Assets: $130.0 billion
    Debt (includes liabilities of assets held for sale): 67.6 billion
    Equity: 47.3 billion

    $15.1 billion not accounted for – probably Preferred Shares plus other owners, including BN parent.
    So, more likely split (Debt / Pfd / Equity) is 52 / 10 / 38

    Brookfield Properties lost $857 million in the first 6 months of 2023.

21. DR says:

    August 30, 2023 at 8:00 am

    partners plain equity is under 9bb. the rest of it is either interests of others in properties directly (rank ahead of BPY prefs) or that large line of exchangeable securities which is very opaque but likely other forms of pref equity

22. DR says:

    August 30, 2023 at 8:09 am

    also, what is odd is that they added 17bb of assets this q, offset by a 12bb rise in debt and a 5bb rise in other parties interests. as though they didnt put up a whole lot themselves to take on those assets.

    and odder yet, it had the effect of plummeting their average rate on their fixed debt. go figure in this environment. either a whack of japanese assets with low fixed debt costs or swapped in some assets with established very low cost fixed debt already on it. or a typo!

23. DR says:

    August 30, 2023 at 8:48 am

    lastly, “unaccounted for” is not possible. opaque yes, but a balance sheet by definition, balances