Brookfield Office Properties Inc T.BPO.PR.P

RE:RE:RE:RE:RE:Tax Changes and Dividends and BPO.PR.E

[SONOFFERGUS]

Indeed they do wynner.  I was comparing the fixed resets -- floating and fixed rate instruments are not directly comparable ofc.

It will be interesting to see how the floaters perform when more cuts come through.  Floaters from the better credits got absolutely smoked when the 25bp cut hit.  This makes no sense of course  -- they should be priced off of the extant policy rate as adjusted for credit risk (which improves when rates are cut unless we're back in a crisis) -- but I don't want to fight a losing battle against Mr. Market.

Fast forward to 6 cuts, whenever that may be.  The policy rate is 3.25%, prime at +220bps is 5.45%, dividends on W/X/Y are $.95375 on par, giving yield on current average price of $9.20 of 10.36%.  That is around the average current yield of the 9 fixed rate resets, so the floaters will have outperformed the FRs to that point (ignoring resets in the interim).

It is fair to generalize that FRs as a whole benefit from higher rates (at least to the point where credit concerns dominate, and we're presumably far from that point for the market as a whole).  See ZPR and TPRF shooting up today as GoC5 sells off because of the bad CPI print. 

What happens to GoC5 with a 3.25% policy rate?  GoC5 spot is 3.43%, so at that level we'd be back to a normal yield curve.  Will term investors believe that inflation has been tamed?  Will the Bank of Canada continue to sell off its bonds to keep a lid on the residential real estate market?  What happens to FR prices if GoC5 does go down?  If we're not in a ZIRP hellscape, they're at least going to reset higher. Hmmm.

What we do know, though, is that lower interest rates help BPO to pay its bills and to get lower cap rates on its real estate holdings.  All else equal, BPO will be a better credit risk in a lower rate environment.  That is why I love the floaters -- win if rates hang around, good chance to win if rates go lower.  A 3.25% policy rate gives a money-market fund rate of 2.75ish%.  How does 10.36% and a dividend tax credit sound then?

What I hate about them, though...hate, hate, hate...is that pref share investors have no love for floaters as a whole.  Brookfield has three issues out with the same dividend formula at $11.20ish.  Power Financial same at $12.90, even though they have traded near par in the past in what was obviously a lower-rate environment.  Power Financial -- perhaps the second best credit in prefdom after RBC -- can't get any love.  I can't wrap my head around the price action.

Rant done for now!