Brookfield Office Properties Inc T.BPO.PR.A

BPY Debt Downgrade

[Carena]

Good morning,

PrefBlog has a good summary of the downgrade. 

The key thing about the Canadian pref share market is that a vast majority of the prefs issued are within Investment Grade companies which make them safe and attactive. This downgrade to Junk is a big one and also has implications for all the ETFs that hold BPO prefs.  This could possibly bring a lot more selling pressure on BPO. 

My quick takeaways on the downgrade:

(a) A potential downgrade was warned about back on Oct 5. The tone is being set for a "game time" scenario for CRE in 2024.

(b) There was nothing surprising in the S&P report and their conclusions mesh well with all the things Bruce Flatt and CEO Kingston have been saying in their press releases, interviews and Investor Days.  Nonetheless, it is a smack in the face to Brookfield to have their real estate empire reduced to Junk status.  

(c) The big picture summary is that BPY has 3 categories of assets...(i) Retail assets are doing fine with occupancy at 95% (ii) Core Office is at 95% occupancy which comprises 64 of 131 assets (iii) The problem is the rest of the assets are at less than 80%.

(d) Banks do not want assets back and are thus being flexible on extensions etc

(e) The key part is as follows:  "BPY’s relationship with BN enhances its credit. Following the privatization of BPY by BN in July 2021, we continue to view BPY’s group status to BN as moderately strategic. We believe BN would provide financial support to BPY under some circumstances and could help facilitate future refinancing efforts including repayment of its March 2024 bond maturity. BPY is BN’s main vehicle for real estate investments and its largest investment vehicle. This group support provides a one-notch uplift to BPY’s stand-alone credit profile."

I personally think real estate is more than "moderately" strategic to BN as it represents the largest poriton of their asset management assets at almost $300 billion.  I think it is critical for BN to see this problem through.

Have a great day,
Carena