PrefBlog

BPO Properties has announced:

a proposal to create Canada’s pre-eminent office real estate investment trust (REIT). Upon conversion, the new REIT, to be named Brookfield Office Properties Canada, will acquire BPP’s directly owned office assets in Toronto, Calgary and Vancouver and will also acquire Brookfield Properties’ interest in Brookfield Place, widely regarded as the top commercial complex in Canada. If approved by BPP shareholders, upon closing of the transaction, it is expected that Brookfield Office Properties Canada will pay a special distribution of $1.02 per unit to unitholders and will also begin to pay monthly distributions of $0.0667 per unit (being $0.80 per unit on an annualized basis), double BPP’s current quarterly dividend of $0.10 per common share.
…
If approved by the Toronto Stock Exchange (TSX), the new REIT, Brookfield Office Properties Canada, will commence listing on the TSX immediately following closing of the transaction. Holders of BPP common shares will receive one unit of Brookfield Office Properties Canada for each common share held of BPP. Upon closing of the transaction, BPP’s common shares will be delisted from the TSX and all of its common equity will be owned by Brookfield Properties. Select assets of BPP, including the Canadian Office Fund and certain development properties, as well as certain assets which are not permitted to be owned by Brookfield Office Properties Canada, will be retained by Brookfield Properties. No changes will be made to the terms of BPP’s preferred shares.
…
The transaction will be effected by way of a plan of arrangement under the Canada Business Corporations Act. It requires the approval of at least two-thirds of the votes cast by all shareholders as well as the approval of a simple majority of the votes cast by common shareholders other than Brookfield Properties and its affiliates. The transaction must also be approved by the Ontario Superior Court of Justice. The transaction is also conditional upon receipt of all necessary regulatory, TSX and third party consents and approvals.
Brookfield Properties has advised BPP that Brookfield Properties and its affiliates intend to vote all of their shares of BPP in favour of the transaction.

If approved, on closing of the transaction, Brookfield Properties and its affiliates, which currently hold approximately 89.7% of BPP’s common equity, will hold in aggregate an equity interest in Brookfield Office Properties Canada of approximately 91%, including the consideration Brookfield Properties is receiving for the sale of Brookfield Place, net of the impact of retaining certain assets and preferred shares which are not being transferred to Brookfield Office Properties Canada.
…
Analysts, investors and other interested parties are invited to participate in a live conference call and webcast on March 1, 2010 at 4:30 p.m. (E.T.) to discuss the proposed transaction with members of senior management. To participate in the conference call, please dial 866.238.1640, pass code 1434853 five minutes prior to the scheduled start of the call. Live audio of the call will also be available via webcast at www.bpoproperties.com. A replay of this call can be accessed through April 14, 2010 by dialing 888.266.2081, pass code 1434853. A replay of the webcast will be available at www.bpoproperties.com for one year.

An information circular describing the transaction is anticipated to be mailed to shareholders in mid March and will be available on BPP’s website and at www.sedar.com. In addition, a meeting of shareholders to consider the transaction is expected to take place on April 9, 2010. If shareholders approve the transaction at the meeting, and the requisite court approval is obtained, it is anticipated that the transaction will be completed on or about April 14, 2010.

The Supplementary Information specifically states:

Existing preferred shares of BPP will not be assumed by the REIT

At present it is difficult to see what preferred shareholders will be getting in exchange for an affirmative vote on the transaction (I am assuming they get to vote, because it’s a CBCA Plan of Arrangement, similar to the BCE deal). I have eMailed BPP’s investor relations department, asking them to clarify whether BPP preferred shareholders will be voting as a class and whether there are any sweeteners in the deal for them.

Until they answer – or until the proxy documents come out! – I cannot take view on the best way for the Pref holders to vote. However, at first glance it appears that the preferreds will suddenly have all the disadvantages of a holding company investment (being farther from the actual money) with none of the advantages (diversification). This is normally worth a one-notch downgrade in credit.

BPP has three issues of shares outstanding: BPP.PR.G (1.8-million shares); BPP.PR.J (3.8-million) and BPP.PR.M (2.8-million). These are the Amazing Shares That Would Not Die, having been issued by Royal Trustco in 1985, 1986 and 1986, respectively, and changing their name from Gentra to BPO Properties effective 2001-5-7, following a name change from Royal Trustco 1993-6-18.

All three issues are tracked by HIMIPref™, all are relegated to the Scraps index on both credit and volume concerns. BPP.PR.G was last mentioned on PrefBlog in the post What is the yield of BPP.PR.G?. BPP.PR.J and BPP.PR.M were last mentioned in BPO & BPP: S&P Revises Outlook to Negative.

Update Dominion Bond Rating Service has announced:

Under DBRS methodology, the Transaction would typically result in a rating differential between BOPC LP and BPO, with BOPC LP attaining the higher of the two ratings. This is due to the fact that a majority of the assets reside at BOPC LP. However, DBRS believes that the structural issue is mitigated by the following:

(1) BPO currently has no senior unsecured debt.

(2) The articles of BPO will prohibit it from incurring any unsecured indebtedness for borrowed money, or guaranteeing any such indebtedness of any other person, other than indebtedness that is guaranteed by BOPC LP.

(3) In accordance with the Canadian Business Corporations Act, any revision to or removal of the corporate article containing the debt restriction will require approval by special resolution of the common shareholders. Note that BPC will hold all the common shares.

(4) This restriction will not affect the “grandfathered” status of the preferred shares.

DBRS also takes comfort in the fact that:

(1) BPO will receive a cash flow amount from its ownership in BOPC LP that is comparatively equal to the amount under the pre-REIT structure.

(2) BPO will have an investment in liquid REIT units and ownership in a high-quality office portfolio and will maintain certain income-producing assets (the Canadian Office Fund assets).

(3) Going forward, DBRS expects BOPC LP to maintain conservative debt levels and coverage ratios similar to previous levels achieved by BPO and that are consistent with the BBB rating category.

I believe that the reference to “grandfathered” is, to put it in technical language, some tax thing. If I’m right in this, the shares were issued prior to changes in the Income Tax Act which make the financing very attractive on an after-tax basis.

This entry was posted on Friday, February 26th, 2010 at 1:26 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.