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Brookfield Office Properties Inc. Series AA Preferred Shares (BPO.PR.A) |
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Author(s)’ disclosure of share ownership: |
Author(s) hold shares |
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Last updated: |
17-Dec-23 |
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Share Price At Date of Last Update: |
$9.61 |
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Yield: |
11.7% |
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Currency: |
$ Canadian |
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Generic Rating (This rating does not consider the circumstances of any individual investor and is therefore not specific advice for any individual): |
Highly Speculative Buy / Hold |
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SUMMARY AND RATING: These shares are now apparently high risk due to the negative cash flows of the issuer and its immediate parent. See below. These Brookfield Office Properties Inc. rate reset preferred shares (BPO.PR.A on the Toronto Stock Exchange) were originally issued at a price of $25.00 by prospectus dated October 16, 2014 paying 4.75% on a $25.00 amount ($1.1875 per year). The reset spread is 3.15% over the 5 year government of Canada bond yield. On December 31, 2019 they “reset” to pay 4.71% on the par value of $25 or $1.17725 per year (paid quarterly) for five years ending December 31, 2024. Note that preferred shares can have customised aspects that affect their value. We have described the features here but we do not guarantee completeness or total accuracy of this description. For more detail consult the prospectus on sedar.com. On December 15, 2023, they closed at $9.61 to yield 12.2% per year which is indicative of very high risk. Soon after they were issued these shares fell below $25, falling to $15 in early 2016 but then recovered to about $24 by early 2018 and then plunging to about the $12 range for much of 2020 with the pandemic before recovering to the $21 range by mid 2021 and then subsequently sinking as interest rates rose in 2022 and then getting as low as $7.06! in October with that plunge related to credit concerns. There are concerns about office vacancy rate and the credit worthiness of the company and of its immediate parent (Brookfield Property Partners L.P) which guarantees payment. If held in a taxable account, they are eligible for the dividend tax credit. The dividend is cumulative (if they skip a dividend due to financial difficulty, you may later still get that dividend). The dividend will reset every five years and the next reset is due in 12 months at December 31, 2024 and will be set at the yield on the five-year Canada Bond at that time plus 3.15%. These preferred shares are subject to a further market value decline if Brookfield Office Properties outlook worsens and there is some potential for dividends to be skipped or for the entity to go bankrupt with no recovery of this investment. However we suspect that the possibility of such a scenario is unlikely – but not impossible. Parent Brookfield Property Partners L.P. and certain related entities guarantee the credit on these shares (see page 84 of the Brookfield Property Partners L.P. 2022 annual report. These shares should be considered risky in terms of paying the promised yield. And they have certainly proven to be highly volatile in terms of price. If the 5 year Canada bond yield is at its current level of 3.27% at the next reset date (December 31, 2024) then the new distribution would be somewhat higher than current but the main consideration now is not the attractive yield but rather the credit worthiness and risk. In reviewing the financials of the guaranteeing parent (Brookfield Properties L.P.) we found that entity to be very complex. We also saw that the recent cashflows and earnings are negative which is a definite concern. We saw that they have very large amounts of high-cost variable interest debt. But we also saw that the debt mostly has recourse only to individual properties. It appears that cash can be made available to pay the distribution by selling assets or allowing the lenders to take over the most problematic properties. Overall, we would rate these shares a Highly Speculative Buy / Hold. Note also that these shares are quite thinly traded which can add to price volatility and means that a fixed price order to buy or sell should be used as opposed to a market price order. |
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INSIDER TRADING / INSIDER HOLDING: There are no recent trades listed therefore the insider trading signal is neutral. |
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Symbol and Exchange: |
Brookfield Office A Pref (pays $1.1775 spread 3.15%, reset December 31, 2024) |
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Basis and Limitations of Analysis: The following applies to all the companies rated. Conclusions are based largely on achieved earnings, balance sheet strength, achieved earnings per share growth trend and industry attractiveness. We undertake a relatively detailed analysis of the published financial statements including growth per share trends and our general view of the industry attractiveness and the company’s growth prospects. Despite this diligence our analysis is subject to limitations including the following examples. We have not met with management or discussed the long term earnings growth prospects with management. We have not reviewed all press releases. We typically have no special expertise or knowledge of the industry. |
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DISCLAIMER: All stock ratings presented are “generic” in nature and do not take into account the unique circumstances and risk tolerance and risk capacity of any individual. The information presented is not a recommendation for any individual to buy or sell any security. The authors are not registered investment advisors and the information presented is not to be considered investment advice to any individual. The reader should consult a registered investment advisor or registered dealer prior to making any investment decision. For ease of writing style the newsletter and articles are often written in the first person. But, legally speaking, all information and opinions are provided by InvestorsFriend Inc. and not by the authors as individuals. The author(s) of this report may have a position, as disclosed in each report. The authors’ positions may subsequently change without notice. |
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