Brookfield Office Properties Inc T.BPO.PR.P

RE:RE:RE:RE:RE:RE:B.O.C. Interest Rate Announcement

[SONOFFERGUS]

Hi Pierre.

I have posted previously about the curiious trading levels of floaters generally.  Suffice to say I like them for current yield and for potential appreciation when BPO credit risk improves as rates decline.  As wynner notes, the "good" issues of 70% prime floaters trade in the low teens and BPO floaters trade at a big discount to those issues, so if Mr. Market comes to appreciate both floaters and BPO in a lower rate environment, they have more room to appreciate than say the Ts at $15ish.

Re rates, it would take another 150bps of cuts until the average current yield on the floaters is reduced to that of the 9 fixed reset issues (assuming the 220bps spread of prime to the policy rate is maintained).  At that point, what will the yield curve look like and how will BPO fixed reset prices have reacted?  Will the current pre-tax advantage of the floaters of 350ish bps be overcome?

Re illiquidity, I view wide bid/offer spreads as a source of huge outperformance.  Why pay for liquidity if you don't need it?  Set up to buy W/X/Y at a price you like, and you may get filled when a long has to blow out their portfolio.  Same thing for a sell ofc, although perhaps a little dicier.  In the meantime, the big dividends -- and, remember, they will always be big compared to floating rate alternatives given the price-to-par gearing -- are protective.

Best,

Sonoffergus