Thoughts......Hi there,
My last post was on June 30, 2023.
My favourite BPO pref is the N series and it is down 35% from its high since my last post. There are 11.5 million shares of this series outstanding and approximately only 600,000 shares have changed hands since June 30 or just 5% of the shares outstanding. The most recently published short position is 35,000 shares or well less than 1% of the shares outstanding. Absolutely crazy!
For the record, I own positions in various BPO prefs. I just purchased a 1,000 shares of N a couple days ago at $7.50 per share.
My small investor thoughts, for whatever they are worth:
(a) The BPO prefs made a huge recovery post March 2020 and then began a decline in early 2022 as the Fed began to tackle inflation and this was understandable given that BPY's asset values would take a hit as a result of higher interest rates and the fact it was a highly levered, but wholly -owned subsidiary of Brookfield
(b) The BPO prefs began their craziest period in history when in February 2022, the Brookfield DTLA situation arose wherein Brookfield DTLA defaulted and began a process to hand some keys back to the banks. From my research, the DTLA buildings were held in what I call a vehicle or joint venture type structure (with, I think, Angelo Gordon) that was largely capitalized with a publicly traded preferred share. This was obviously a failed venture and the pref share rightly so, went to zero. At the end of the day, BPY put capital into DTLA way back in 2014 and it failed. It happens.
(c) Subsequent to the DTLA situation, there have not been many data points to digest but the following items have been sticking in my head:
- a portfolio of BPY's DC buildings defaulted I think in March 2023 (BAD)
- the yield curve has been de-inverting as the bond market has come to the realization of "higher for longer" (BAD)
- BPY financials continue to get quite ugly with NOI < interest expense (VERY BAD)
- the CFO of BPY, Bryan Davis, has purchased not immaterial amounts of BPY pref shares (GOOD)
- the spreads on CMBS have widened significantly (BAD)
- CRE companies like VNO and SL are still well above their 52 week lows(GOOD)
- threat of a downgrade to BPY's credit rating to junk (BAD)
- the BPO entity repaid $300 in senior notes in July and issued new notes without any noise (GOOD)
- the Brookfield investor day in September was highly constructive on Brookfield's real estate holdings and of note, Brian Kingston, Bruce Flatt and Nick Goodman all made the point of talking about "permanent capital" and "price only matters when you go to sell an asset" and "day to day fluctuations in price are irrelevant" - this is a GOOD, because I agree with them and my thesis on the BPO prefs is that they make up a sliver of Brookfield's "permanent capital" which means they will never do anything to jeopardize this kind of "forever" capital eg cut dividend
- however the current market pricing is telling us that this "permanet capital" is in jeopardy(BAD)
- just recently the Financial Times came out with yet another hit piece on Brookfield and Bruce Flatt, and I enjoyed Bruce Flatt's quotes saying that refinancings are not a problem and him basically saying "GET LOST" (GOOD)
- and finally the other day a 6-K SEC filing was disclosed and to be honest, I have not got a clue what any of that means. However, the market is telling us this must be a BIG BAD!
In Conclusion:
(i) If you believe in the free cash flow forecasts discussed at the Brookfield investor day in September, then I believe Brookfield will allocate whatever Brookfield free cash is necessary to fund its pref dividends to keep its "permanent capital" in place.
(ii) If you go to the Brookfield website and look up their real estate section, it has 2 sections, BPY and BPO. I tally there is about $3 billion in BPY/BPO preferred shares at par value trading in the market - total annual dividend payout of about $200 million per year - this should be immaterial to Brookfield.
(iii) Bruce Flatt is a long long term investor and he knows you need "permanent capital" to survive during these times. I also believe he thinks the ultimate return on BPY's real estate is going to come when the investor world wakes up one day and realizes that the replacement cost to build a Canary Wharf in London or a World Financial Center in NYC is twice the cost of what is on BPY's books. That will be the "time to sell" and perhaps redeem our BPO prefs at the $25 par value. Brookfield, not BPY, just needs to survive until then.
Good luck to everyone and looking forward to the next dividend declarations,
Carena