Arbitrage Trader on Seeking Alpha wrote about the Brookfield Property Partners (BPY) preferred units of which there are 3 issues outstanding.
Summarizing–the shares are trading very low compared to similar real estate owners (primarily REIT preferreds) and should have substantial upside for capital gains.
He covers the topic quite completely so I won’t write more–just that I do own the 5.75% BPYPN issue.
You can find his article here.
Arb Trader ….. My comments on his comments
From the perspective of a U.S. investor wanting to trade Canadian preferred on the OTC, I generally agree with AT. But he misses a very big opp.
U.S. residents can open an account with Interactive Brokers (IBKR) and have full access to the 500 or so preferred issues that trade on the TSX directly. No going through OTC; none of the problems of the OTC.
Leverage – IBKR has by far the cheapest leverage available to retail traders, not that I endorse leveraged trading of Canadian preferred.
Liquidity – if you trade on the OTC you don’t see, or have access to, the true liquidity on Canadian preferred. Most Canadian preferred issuers are large companies, and the preferred issues are large, too. Issues will frequently trade 100k+ shares on the TSX daily and at the same time show little or no volume on the OTC.
For example, RY.PR.R (Royal Bank) traded 90,000 shares on the TSX today, while on the OTC (RYMTF) the issue hasn’t traded since July 2nd, when it traded all of 10 shares. Not ten thousand, TEN. 3 months ago.
Fact is, except for a few issues, trading Canadian preferred on the OTC is challenging. The “easiest” issues to trade are the four Enbridge issues denominated in U.S. dollars. Everything else is something of a challenge.
Misc. info for anyone thinking about an IBKR account to trade Canadians:
IBKR gets the taxes right, unlike Schwab. QDI if it is QDI. 95% of Canadian issues are QDI. Exceptions are a few partnerships and one or two REITS.
You will get a 1099, unless you buy one of the partnership issues, in which case you will get a K-1.
Withholding is 15% in taxable accounts, but you get a credit on U.S. taxes. it’s not on top of U.S. taxes.
Buying through IBKR will not trigger an obligation to file a Canadian tax return or file a FINCEN form.
Withholding in qualified accounts (IRA, etc.) is zero and tax is zero, if your brokerage gets it right. Most do. Schwab never does.
A few of the “Canadian” preferred are actually Bermudian preferred, which have no withholding tax. Again, if your brokerage gets it right.
Execution on the IBKR platform is flawless.
You are dealing in CAN$, just as if you had a Canadian brokerage account (which you actually do).
There is a steep learning curve in buying Canadian preferred, be it on the OTC or on the TSX through IBKR. Be sure you understand how resets and floaters work before you put down serious money. And be sure you understand currency risk, also known as currency diversification.
And here’s to Mr. Dressup!
https://www.macleans.ca/multimedia/photo/the-mr-dressup-prime-minister/
Re: Liquidity:
For the most part with fungible shares the market makers provide liquidity on both stubs, so even through the otc stub looks illiquid there is usually plenty of hidden liquidity, it is an easy arb to make for the market makers. Also, good smart routers (unsure if IBKR does this) will route fungible orders to whatever exchange is showing the best quote and take care of the north/south bound conversion on the backend.
Absolutely not. In theory trading on the OTC should give you access to the liquidity of the TSX but in practice it does not. I say this from having done hundreds of OTC orders on Canadian preferred and probably close to a thousand trades direct on the TSX.
Orders placed on the OTC that should be executable (buy order at or above the offer, or sell order at or below the bid) won’t get executed. I have had executable orders sit for days at a time.
In contrast, IBKR does all its executions through the TSX. If I enter an order on IBKR that is a one penny improvement on the existing bid or ask it shows immediately on the TSX website, so I know they are hard wired to the TSX. If I enter an order that is executable based on the existing bid or ask it executes immediately.
So, again, you are wrong as a practical matter.
I would add that never will you be asked to pay a $50 fee trading Canadian preferred on IBKR.
Hey A.T ….You are one the best. Learned a lot from you.
Arbitrage trader myself commenting:
It was a big miss on my part to not include the Canadian prefs or just mention the article written on SA. I just don’t do research on Canadian prefs anymore for several reasons:
1.) No way to get any decent leverage
2.) The very low volume which makes larger positions hard to trade
3.) Higher commissions and no prop firm I work with offers TSE
This is one of the forums I really appreciate and Tim does a great job so here is my view at the moment:
It may pretty much be the case in which BPY and BPYU have more Alpha on the short side compared to the prefs on the long side. The problem is that we can not short the business of BPYU and have to short the price which is going only higher every single day outperforming companies like NNN, KIM, VNO, BXP, SLG.
How on earth would GGP with its 10% financing costs outperform KIM with its 2% financing costs when leverage is the name of the game for these companies. Are BPYU properties 5 time superior – Not very likely 🙂
If for any reason BPYU/ BPY pricing proves to be correct, the prefs have to go to Par. Even if the market is making a mistake in evaluating the commons, it has to make the same mistake in evaluating the prefs. Both commons and prefs live on the same planet.
P.S. I have never claimed to give investment advice, just presenting some interesting mispricings and trying to benefit while posting my honest opinion and trading this opinion for real ( taking losers often).
Good Luck to all
What about the concern that BPY has screwed preferred investors in the past so there is a concern that they will do it again? Could be enough to hold the price down.
Wonder if they are current on CMBS debt. You would not guess where it’s trading.
Gamesmanship is still alive.
BPYU has defaulted on a couple non-recourse mortgages as of last Q and there may be more to come. But since it’s non-recourse it’s not a huge deal unless it becomes a lot more.
My only concern is potential sympathy fallout from a BPYUP suspension. In the comments, AT even says that BPYU’s bond prices indicate a distressed situation and BPYUP is potentially in trouble and he’d never invest there. Even if BPYUP suspended, the BPY preferreds should be fine and no reason they have to suspend but you’ll probably go through a lot of unnecessary volatility and drama in the BPY prefs in that scenario.
The following things would not surprise me: BPYU violating bond covenants and a BPY common dividend cut. Both could produce volatility in the preferreds.
I believe BPYUP is a similar issue from BPYU, the REIT guise of BPY. It has a higher yield and deeper discount than the BPY issues and (I believe) no K-1. It is past its call date but trades at a deep discount. I don’t know the relative safety of an issue from BPYU vs BPY.
Farwell–for what it is worth the REIT version is unrated while the LP version is rated BB+ (a notch below investment grade) by S&P
Yeah the credit ratings don’t make sense to me. BPY has the same rating as BPO even though the latter is structurally superior since it has none of the mall exposure and BPY gets no divs from BPO unless BPO preferreds are paid first. BPYU is clearly complete crap and if it had a bond rating would be distressed deep junk. BPY’s dividend depends in part on rent collection from BPYU’s malls and thus is ripe for a cut. Also if BPYU violates bond covenants, probably no divs can be passed up to BPY.
Frankly, BPY’s stock price is skating on the Brookfield name and in no sane world should its stock price be outperforming the likes of VNO.
Brookfield has a reputation for screwing over preferred holders/minority partners, etc. Might be a good reason that these trade cheap.
Karma–any chance you can expand on this topic?
DTLA- sends their regards 🙂
mcg–ok–yes that rings a bell, but I can’t remember all the details.
Think he is referring to this case:
https://www.dtlaofficefund.com/
And it is true that Brookfields org chart is almost as complex as Icelandic crossownership in 07.
Thanks Peter–yes now I remember and yes the org chart is extremely complex–the more complex the org or issue the less demand-i.e. this is why some of the convertibles trade weak. Thanks for the link.
Some discussion of Brookfield here:
https://www.cornerofberkshireandfairfax.ca/forum/general-discussion/list-of-sh*t-actors-in-the-public-markets/
https://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/dtla-preferred/
Yet there’s no new info on DTLA- in that link that I see, is there???? It’s still unpaid since 2015 or ’16. I take the easy way out in following the DTLA- situation by owning shares of Goldstein’s SPE since he’s the activist shareholder who sits on the Board…hopefully some day it will all work out but this covid stuff sure can’t be bringing that day any closer..
Brookfield pretty much screwed over TK and TOO shareholders with the way they acquired TOO. But you could argue it’s their job to take candy from a baby if the opportunity presents itself. TK and TOO shareholders should be blaming TK/TOO management, not Brookfield.
Canadian BPO’s are a lot more attractive…They been hammered while the common BPY has been on a tear…Efficient markets ? right..
The cheapness of canadian prefs relative to US prefs is mindblowing.
Funny story. On SA someone asked him why he wasn’t looking at the canadian ones. Answer: I can’t get up to 6 times leverage on them. Hmm sounds like a guy you would take investment advice from 🙂
Yes Peter–that is why I picked some of this up recently–it is BB+.
Bpyu and bpo is basically the same credit. But with BPO you can buy a min. reset @8,25 pct. 15 price. With 5y resets you can get 9,5 pct. and a pref. That will never get called.
Another example is BEP-A trading at around 3 pct. ytc. In canada you can buy a min. reset yielding 5,7 pct. at 22 price….pretty significent dislocations 6 months after the crash..
Newbie question: What do you mean by ‘min. reset’, Peter?
Also, if BEP-A is the US issue, what is the Canadian analog yielding 5.7% at $22?
Minimum resets are a canadian speciality. They pay 5y gov. + a spread, but a minimum of x pct. That means you get a floating rate pref, but you are protected if rates fall. Most of them trade close to or above call price. But a few are still below.
BEP.PR.K – no longer at 22, but 22,5 yielding 5,5..
I follow a universe of 35 Canadian min rate issues. 4 of the 35 trade (stripped) above redemption amount, and they exceed redemption by 1, 2, 7 and 8 cents. Not percent but pennies.
A couple of days ago, a new Canadian SA writer reported that the “implied Canadian subsidiary of Brookfield Property Partner (the daughter) holds many of the higher quality assets and less debt.
https://seekingalpha.com/article/4377901-brookfield-property-partners-structurally-superior-preferred?app=1&utm_medium=email&utm_source=seeking_alpha&mail_subject=pre-market-summary-on-your-portfolio-portfolio-1&utm_campaign=nl-portfolio&utm_content=link-23
For many months, I was trying to figure why two of my Canadian positions, EBGEF which was climbing or at least trading nicely before COVID-19 and fell out and never recovered (Ditto for ERRAF, a lower coupon). I believe that both of these positions suffered from eroding Canadian dollars vs. USD.
May have some of the BPYPP, BYYPO and BPYPN (Not sure how many these days due to failure of Investment Account Manager which fails to download from Vanguard brokerage and refuse to help despite annual $110 tech support fees LOL) along with the common BPYU. There was a SA article criticizing the debt load and implied risks of BPY and BPYU, Brookfield Property REIT. The stock did not drop much. In recent trading days, there were very nice gains on BPY and BPYU commons. I trust Brookfield, which did not take advantage of the minority shareholders of the TeeKay Offshore and allow all preferreds of Teekay continue to trade and as Tim has noted recently the ALIN E, B and A, preferred units of the old TK Offshore completely acquired by Brookfield. Brookfield Renewable preferreds and the new Brookfield Intrastructure preferred have been trading way above par. The market seems to respect Brookfield renewables more than Moody and SP. Disclosure: I have large positions on all Brookfield. Not sure how much or many (Le Du software failed to include ALIN-B, E and A). LOL. Except for the renewable Brookfield. Brookfield Property REIT preferreds were never rated as Investment Grade.
Both ebgef and erraf are 5y resets (floating rate) based on 5y gov. Rates. All those got killed when 5y rates dropped to 35 bp.
They will perform when (if) rates rise…
Arbitrage is not like many of us here. I bought into his service for a year and benefitted and helped the service. In the end, I do not day trade, so I cancelled the service after a year.
– He, his team, and members of his service finds arbitrage opportunities.
– He uses a lot of statistics to find opportunities
– He buys an enormous amount of investments on leverage. Throw a lot of money onto an opportunity, reap the benefit and get out. These are short and long buys. The long buy might last 2 hours to a few days.
– He uses brokers that provide low cost lending, because he might only use the leverage for a few hours.
– The arbitrages are anomalies when comparing pertinent variables to like or similar investments.
– The ideas is that the anomaly exists for a short time, and when it is gone, he exits the investment.
– He does keep a smaller portfolio invested in preferreds, but he is not a buy and hold investor.
– He is very good at this targeted trading and respect him and his trading team for his style.
Thanks for this background detail and perspective, MC.