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Brookfield Office Properties Inc. Series GG Preferred Shares (BPO.PR.G) |
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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: |
$12.26 |
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Yield: |
13.3% |
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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.G on the Toronto Stock Exchange) were originally issued at a price of $25.00 by prospectus dated April 27, 2017 paying 4.85% on a $25.00 amount ($1.2125 per year) and with a minimum reset dividend of 4.85%. On June 30, 2022 they “reset” to pay 6.546% on the par value of $25 or $1.6365 per year (paid quarterly) for five years ending June 30, 2027. 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 $12.26 to yield 13.3% per year which is indicative of very high risk. Soon after they were issued these shares fell below $25, falling to the $20 to $21 range starting in late 2018 and then plunging to about the $15 range for much of 2020 with the pandemic before recovering to the $24 range by early 2022 and then subsequently sinking as interest rates rose in 2022 and then plunging as low as $8.80 in October with the more recent declines due to serious credit concerns. There are concerns about office vacancy rate and the credit worthiness of the company and its immediate parent. 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 but the next reset is not until June 30, 2027 and will be set at the yield on the five-year Canada Bond at that time plus 3.74% and with a minimum yield (on $25) of 4.85% or $1.2125 per years. Brookfield cannot redeem these shares before June 30, 2027, but on that date (and on each future 5 year anniversary) can redeem at $25. There is definitely no guarantee they will redeemed at $25 – ever. These preferred shares are subject to a further market value decline if Brookfield Office Properties and its immediate parent (Brookfield Properties L.P.) 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. While bankruptcy seems unlikely it may be a possibility. The prospectus indicates that the parent Brookfield Property Partners L.P. guarantees the credit (see also page 84 of its 2022 annual report) and it had a fairly low credit rating of BBB (low) as of March 2022 and the market currently expects the credit rating to be cut to below investment grade. These shares should be considered risky in terms of paying the promised yield. And they have certainly proven to be very 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 (June 30, 2027) then the new distribution would be somewhat higher than the current level but that’s too far away to place any significance on. 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: |
BPO.PR.G, Toronto |
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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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