March 29, 2023

Markets were strong on Wednesday as the S&P 500 rose 1.4% and Toronto rose 0.9%.

lululemon was up 12.1% after releasing earnings and outlook. 

Shopify was up 5.1%.

The Brookfield Properties Ltd. rate reset preferred share that is on out list (BPO.PR.G) was down 2.8% and is down 16% this year to date. The yield is now 10%. Clearly, it is credit concerns that is pushing this down. In adding this share to the site I did not potential credit risks but at the same time I indicated that I did not think that default risk was much of a concern. Apparently the market disagrees. There has been speculation recently that commercial real estate will run into defaults and that office properties in particular are problematic. On top of that a Brookfield subsidiary recently defaulted on two large bonds on Las Angeles office buildings. The credit of this share is apparently guaranteed by Brookfield Property Partners L.P. The dividend is cumulative which is comforting. This is a complex situation. I don’t think Brookfield Property partners could default on this without essentially declaring the whole of Brookfield Property Partners L.P. to be insolvent. Looking at the annual report of Brookfield Property Partner’s L.P., it is a large and complex entity but it was profitable in 2022 and does not appear to be in financial danger. At the same time, this is a complex entity and it seems anything can happen. I will be holding my investment in this preferred share and a similar one BPO.PR.A . Given the risks that the market seems to be signaling, I am not about to add to my positions despite the attractive yields.

If interested, do a control-F in the 2022 comments where I did mention this preferred share a few times.

Overall, rate reset preferred shares have been a terrible investment especially when purchased anywhere near par. Only when purchased at big discounts have they been good investments it seems. 

P.S. A company like Brookfield often uses non-recourse debt. That Los Angeles  debt was secured by specific buildings and nothing more. Executing their legal right to default on the debt and negotiating with the debt holders as they are now doing is quite a different thing than potentially being unable to pay the dividends on these pref shares. In other words  the possibility of Brookfield not paying the dividend or going into receivership on this part of their empire probably remains very remote even though their portfolio of buildings is likely less profitable than previous.

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