DTLA - DTLA Holdings

[tiddman]

In 2013 Brookfield acquired MPG which created a new company called DTLA holdings and MPG's preferred stock was converted to a DTLA preferred.  However they did not pay the dividends on the preferred, somewhat unusual for Brookfield.  This preferred stock languished, and in 2015 Brookfield said they "intend" to resume payments on the preferred by 2023.

 

https://www.prnewswire.com/news-releases/brookfield-dtla-says-it-intends-to-resume-dividend-payments-on-preferred-stock-by-2023-300161286.html

 

Bulldog Investors (veteran activist fund managers, they run closed end fund SPE) owns a significant stake in the preferred and a few weeks ago got 2 seats on the board of DTLA:

 

https://www.businesswire.com/news/home/20171213005743/en/Bulldog-Investors’-Nominees-Elected-Directors-Brookfield-DTLA

 

At this point the preferred stock is owed around $14/share of dividends increasing at around $1.90 per year (it's a 7.625% preferred).  Currently trading for around $28/share, so that's $11/share of upside if and when the dividends are ever paid up. Bulldog's presence on the board should hopefully encourage Brookfield to do this.  More info available in SPE's most recent letter.  SPE is an interesting investment in its own right.

 

http://www.specialopportunitiesfundinc.com/pdfs/SOF-Semiannual%20FINAL.pdf

[MrB]

Why has the dividends not been paid?

[ValueMaven]

this is SUCH an interesting idea...a few questions 1) Why did they stop paying the dividend 2) What the heck am I even buying here?  Where is the cash coming from?  Thank you for sharing this!

 

Sincerely,

ValueMaven

[beerbaron]

Well, I would think that this is what you buy if you buy DTLA. Not sure how to value it but it semms a classic case where the assets are worth more than the cash flow it produces. Management is likely timing their exit and wants to hold the cash until they sell. What do you guys think?

 

Brookfield DTLA owns BOA Plaza, EY Plaza, Wells Fargo Center–North Tower, Wells Fargo

Center–South Tower, Gas Company Tower and 777 Tower, each of which is a Class A office property

located in the Los Angeles Central Business District (the “LACBD”).

[johnny]

Five minute take: $2.75B in assets, $2.1B in liabilities.

 

So $650m in shareholders equity, with almost $1B in mezzanine equity. Already worried. Are the properties understated on the balance sheet? Maybe, but then we have to explain why they aren't putting up amazing numbers on the income statement relative to those understated values. Considering the investors in this just recently got blown out on NYRT, they might want to proceed cautiously on any thesis of Skyscraper appraisals being within $100m of realistic.

 

If we assume that the common equity is, as it appears to be, basically worthless, isn't management's rational use of every dollar of cashflow to throw those dollars into repaving the driveways, thus increasing their asset-base/rents/fees? And isn't it clearly not in their interest to throw good money after bad, desperately trying to make the preferreds whole in order to salvage their totally underwater common stake?

 

So, ultimately this boils down to understanding exactly why Brookfield asserted that it was "highly likely" they'd resume dividends at some point. That's not a promise, and it's no guarantee. As far as I can tell, no component of that was built into the actual settlement of the case, so it is not even sorta-kinda binding. In fact it seems to me that the affidavit was delivered in the fall of 2015, and the settlement-mandated dividend occurred in the winter of 2015. In other words, to the extent that quote -is- in fact a promise or assurance, Brookfield already brought itself into performance with their single special payment. Dividends were in fact resumed. And then stopped. Promise kept. Enjoy the bag.

 

I think you should need to see a pretty specific legal theory that gets you to being able to force action. But this is a cool situation and I look forward to learning more about it (while you all do the work for me, hopefully).

 

 

[johnny]

Okay, I've read the affidavit. This "dividends within 8 years" is simply a component of an argument that is really about trying to get the judge to lower his assessment of the Actual Value of the settlement. He is basically saying that the settlement only moves forward dividends that were probably going to happen anyway, so the settlement value isn't the gross payment made, but the time-value of the payment being shifted up 8 years. The real goal here was to lower the settlement value and lower the compensation to the plaintiff's attorneys.

 

There's absolutely nothing about this which I would take to be an actual reflection of management's interest or intentions. It's not like the Maryland judge is going to rise from the grave and impose divine retribution on G Mark Brown for slightly fibbing in a filing that is generally understood by everybody to be nothing more than an exercise in trying to fib as much as is practical without perjuring yourself.

[Foreign Tuffett]

Okay, I've read the affidavit. This "dividends within 8 years" is simply a component of an argument that is really about trying to get the judge to lower his assessment of the Actual Value of the settlement. He is basically saying that the settlement only moves forward dividends that were probably going to happen anyway, so the settlement value isn't the gross payment made, but the time-value of the payment being shifted up 8 years. The real goal here was to lower the settlement value and lower the compensation to the plaintiff's attorneys.

 

There's absolutely nothing about this which I would take to be an actual reflection of management's interest or intentions. It's not like the Maryland judge is going to rise from the grave and impose divine retribution on G Mark Brown for slightly fibbing in a filing that is generally understood by everybody to be nothing more than an exercise in trying to fib as much as is practical without perjuring yourself.

 

I agree with johnny that affidavit is pretty marginal in the big picture.

 

The real issue is improving the buildings' cash flow, which right now is poor, especially relative to the amount of leverage piled on them. I Google'ed around and it seems like there's lots of excitement around DTLA real estate, yet the 6 buildings in question languish at 85% occupancy.

 

 

[Picasso]

Four things for these preferred. 1) Look at rents at these buildings over the past twenty years. They barely move. 2) Look at occupancy rates historically + new supply coming online. It’s staying at 85-88% occupied and not going to 95% for a very very long time if at all. 3) Too many contra indicators (like say Bulldog) are in this trade and it’s illiquid. There are easier ways to make a low double digit return best case scenario. 4) Look at how rents are staggered, you have almost no way to see rental growth. My guess is BPY sells their equity stake within a few years and lets someone else figure out what to do with the preferred.

 

I owned it in the past and sold the more I thought about the merits of the investment and as I did some additional due diligence. Easy pass the more you look at it, but intriguing at first glance.

 

Edit: that said what’s the downside here? Not a lot. But the upside is kind of lame because it’s highly unlikely anything good happens anytime soon. So to clarify that made it a pass for me, not because I see lots of downside risk.

[johnny]

~$20M a year in fees, with an option on DTLA real estate suddenly going Shanghai. What would you ballpark as a price for the equity?

 

 

[tiddman]

Thanks for the replies/questions and for taking a look.

 

In the last 10-Q before MPG was acquired (period ending 9/30/2013) it had total assets of $1.28B and liabilities of $1.71B, and shareholder's deficit of $437M.  The company had four trophy buildings in downtown LA that were stagnating and had high vacancy, and the trust had a difficult history up to that point, obviously over-leveraged and under-performing.

 

In the first report for Brookfield DTLA (annual report for period ending 12/31/2013) it shows total assets of $2.9B, liabilities of $2.0B and "mezzanine equity" (preferred stock) of $0.9B and shareholder equity near zero.  This reflects Brookfield combining MPG with other properties and subsidiaries that it already owned, effectively recapitalizing the new combined company.  It had no common equity but did have substantial preferred equity.

 

The DTLA preferred that is the topic of this thread was originally the preferred stock of MPG which was converted into preferred stock of the new holding company.  In this 10-K, they say the stock has a par value of $25/sh and redemption value of $339M which includes unpaid dividends which is about $35/sh.  This $339M is about 1/3 of the preferred equity of DTLA (there are other preferred interests).

 

DTLA was a subsidiary of BPO (Brookfield Office Properties), but is now a subsidiary of BPY (Brookfield Property Partners) after Brookfield restructured their property businesses.  BPY is now enormous with $78B of assets and over $5B of revenue, so DTLA is small potatoes for them.

 

In the 2014 10-K DTLA made this disclosure:

 

The Series A preferred stock has no stated maturity date, Brookfield DTLA is not obligated to declare and pay dividends on the Series A preferred stock, and Brookfield DTLA may never declare dividends on the Series A preferred stock. The Series A preferred stock has no stated maturity, and accordingly, could remain outstanding indefinitely. In addition, while the Series A preferred stock will accumulate dividends at the stated rate (whether or not authorized by the board of directors of Brookfield DTLA and declared by the Company), there is no requirement that Brookfield DTLA declare and pay dividends on the Series A preferred stock, and Brookfield DTLA may not declare and pay dividends on the Series A preferred stock in the future. Furthermore, because of the projected cash needs of the Company, arising in significant part from the funds needed to complete the refinancing of the existing mortgage loans on Wells Fargo Center–North Tower and Gas Company Tower at a target leverage ratio of approximately 60% to 65%, the Company currently anticipates that it will receive no substantial distributions from New OP for a period of at least five years, unless the Company or DTLA OP changes its current plans and determines to sell one or more of its real property assets prior to such time, except for a one time dividend of $2.25 per share of Series A preferred stock in connection with the proposed settlement of the Preferred Stock Actions. See Item 3 “Legal Proceedings—Merger-Related Litigation.” The Company’s refinancing and operating plans and this estimate are subject to change based on many factors, including market conditions in applicable debt, equity and leasing markets. See “—Factors That May Affect Future Results” above.

 

This is the crux of the matter, the preferred stock has accumulated dividends but Brookfield says they are not obligated to pay them.  The holders of this preferred stock obviously disagree.  It is an unusual move for Brookfield which is otherwise well-capitalized and has a good reputation, but it seems that the performance of the underlying properties/business was not sufficient for them to pay these dividends.

 

This led to a series of lawsuits filed by MPG investors which was settled in 2015 for a $2.25 payment on the preferred and some legal fees.  This reduced the accumulated dividends on the preferred but most of them still remain.

 

This I believe led to Brookfield's curious statement in 2015 that I linked earlier that they "intend" on resuming payments to the preferred "within 8 years" (the year 2023). I don't think that this is necessarily legally binding, though would be good evidence for future lawsuits.

 

Meanwhile, performance of the properties still is not great, they have run at a loss since the merger.  Vacancies are still pretty high.  They did recently announce that they're building a new building on one of the parcels of land that they acquired in the deal:

 

http://www.ladowntownnews.com/development/brookfield-wants-to-build--story-condo-tower-next-to/article_8eafec40-5871-11e7-ba09-73183bcc3c93.html

 

That is where it stands.  While it is unusual for Brookfield to try to screw their shareholders, I think it is clear why they are reluctant to make payments on the preferred stock, since the company is consuming cash.  They probably believe that the downtown LA real estate market is either at a cyclical low or can be improved with new development.  Being a preferred stock, the DTLA preferred is ahead of the common stock but behind any debt.  Owning the preferred is a bet on a combination of this local real estate market and Brookfield's ability to make a profit there, combined with Bulldog Investors' (who now have 2 seats on the board) ability to convince Brookfield to do the right thing for its shareholders.

[racemize]

I think there's a few critical features that are being missed:

 

1) This 8 year deadline is there, I believe, because they need to pay off the private investors/partners.  The institutional investors that joined in do not usually have an indefinite holding period, and Brookfield's reputation is on the line to get them their money (as well as their own):

The owners of Brookfield DTLA, Brookfield, and three institutional real estate investors made the acquisition of MPG for the purposes of receiving a return on their investment. Therefore, Brookfield DTLA is incentivized to pay the accrued dividends on the Preferred Stock so that they can receive a return on their common stock investment...

 

2) In a recent interview with BPY's CEO, he specifically called out DTLA as something he was excited about.

 

3) While the income statement doesn't look good, you can see that there is cash being used to upgrade the buildings--they put in $185 million over the last 4 years, and the 10-k indicates that they only plan on another $110 million of investment from 2016.  Additionally, you can see a run rate of ~$60 million a year in the cashflow statement towards upgrades.  So that may mean they are cash flow positive as soon as the end of this year.

 

4) Moreover, these renovations are costing them rents, and many of the rents they have are below market.  Cash flow should increase further.  Add to that a recapitalization to drop a lot of high interest debt (these preferreds included), I'm pretty positive on this over a 2 year+ timeline. 

 

Mostly, though, if you think Brookfield as good operational experience (and I do), and we're towards the front of getting paid, seems pretty nice in the type of market we're in.

[tiddman]

It looks like there are 3 other classes of preferred equity investors "Series A-1 preferred interest", "Senior participating preferred interest" and "Series B preferred interest" besides the publicly traded "Series A Cumulative Redeemable Preferred Stock" which is the subject of this thread.  This ownership is complex, split between various Brookfield subs, some of which I'm assuming represent their institutional partners. The Series B is ahead of the others, and they've received more cash from this series recently and payments on that is ahead of the Series A.

 

They are generating some cash (about $25-35M annually) and as you noted basically reinvesting it all into the properties.  However they've also been required to put cash into their refinances (rather than get cash out) and still need outside cash.  I do expect that based on these investments and Brookfield's operational experience they should be able to improve cash flows eventually, though they're also somewhat at the mercy of the market itself.  The huge new residential tower is a testament to their confidence in this market.

 

The dividends owed on these preferred shares are about $136 million, which isn't something that it looks like they can afford to pay anytime soon, unless they do some more capitalization changes.  However even if this pays out in a few years it is likely to be a decent return.

[johnny]

It's not just senior to the A, but also yielding 9%. And they've tripled the amount of it in 2017, adding over $100M of capital. Doubt that the cap-rate on the buildings is beating the 9% they're paying on that new capital.

[racemize]

https://www.dtlaofficefund.com/~/media/Files/B/BrookField-DTLA/reports-and-filings/DTLA%20Pref%20Investor%20Day_May%202018%20FINAL.pdf

[arbor89]

Any reason for the recent softness in the Preferred Shares?

[Philbert77]

In the Special Opportunities Fund 2018 Semiannual letter they again mention DTLA: http://specialopportunitiesfundinc.com/pdfs/sof-semiannual-final-2018.pdf

 

"The dividends on our 7.625% Series A Cumulative Redeemable Preferred Stock of

Brookfield DTLA Fund Office Trust Investor Inc. (DTLA-), the owner of several high-rise

office buildings and a shopping mall in downtown Los Angeles, have been in arrears

for several years. The sum of the face value of the preferred shares and accrued

dividends is more than $41 per share, well above the current stock price of about

$23. Andy Dakos and I have seats on the board. Based upon recent presentations

by management to shareholders (including a tour of the company’s properties), we

believe Brookfield is making the right moves to increase the value of the properties

and that preferred shareholders will ultimately be rewarded by payment of the

accrued dividends or being taken out at a premium to the current market price."

 

I was hoping for something a bit more concrete than that,  but I am willing to continue hold as I believe I will eventually rewarded.

[johnny]

A long shot, since I'm sure this would have been mentioned unsolicited, but did anybody on the board actually go to this May presentation thing?

[johnny]

Any reason for the recent softness in the Preferred Shares?

 

The B preferred interest tripled in April. Tons of new capital coming in, ahead of you in line, with a higher return, and some amount of payment actually occuring:

 

During the six months ended June 30, 2018 , Brookfield DTLA made distributions totaling $12.5 million to DTLA Holdings as preferred returns on the Series B preferred interest using cash on hand.

 

 

[Philbert77]

I want my dividends too...

[samwise]

Any reason for the recent softness in the Preferred Shares?

 

The B preferred interest tripled in April. Tons of new capital coming in, ahead of you in line, with a higher return, and some amount of payment actually occuring:

 

During the six months ended June 30, 2018 , Brookfield DTLA made distributions totaling $12.5 million to DTLA Holdings as preferred returns on the Series B preferred interest using cash on hand.

 

So what is the end game here for Brookfield besides extracting cash via the series B? Does anyone with some experience in credit think the following scenario is possible?

 

1. Brookfield DTLA owns the common shares and also owns the "Series B preferred interest" in the Operating Partnership as shown in slide 24 of their presentation filed with SEC on May 9th, 2018.

2. The series B are senior to the series A as shown in slide 23 "hypothetical liquidation".

3. Per the posts above, more series B can be issued.

 

1+2+3 = Brookfield can issue enough series B to bankrupt the equity and preferred A, and convert Series B to the new equity. Effectively Brookfield DTLA would retain ownership and get rid of the preferred A.

 

Is this legally possible? Would Brookfield do this?

 

Seems out of character given they do seem to post presentations for the DTLA shareholders, but perhaps others have given the credit protections of the series A some more thought?

[Philbert77]

more mention of DTLA: http://east72.com.au/wp-content/uploads/2019/10/E72-Quarterly-Report-Sept-2019.pdf

 

"DTLA has two significant debt liabilities upcoming:

 

• $220m in November 2019; and

• $765m in October/November 2020 with options to extend $500m of this for 1-3 years

 

In some ways, the debt repayments – whilst not mandatory – do act as a potential catalyst towards an all embracing refinancing. Brookfield have been supportive of DTLA through the Senior “B” interest which ranks ahead of the publicly traded preferred shares. This does raise the potential risk of Brookfield continually putting funds into the structure with prior ranking. However, in turn, this depletes the potential value of their parallel series A1 preferred interest, as well as their wholly owned common equity.

We view DTLA as a rare piece of distressed paper with significant upside through the repayment of all or part of the cumulative dividends and principal in the event of a portfolio sale. There is no guarantee that the preferred shares may not “transfer” with the structure; however, the fact the Brookfield preferreds would also be locked-in under that scenario suggests otherwise."

[Seth Lowry]

Here is some background on Brookfield's "reputation" and its willingness to abuse minority shareholders through capital structure subordination/manipulation

 

https://seekingalpha.com/article/4291268-brookfield-business-partners-partner-like-needs-enemies

 

I've also attached a case study on terraform power and BREP

 

Let's see if BPY can make a hat trick on minority shareholder abuse

Terraform_Power_Case_Study.docx

[Philbert77]

I get that. I exited graftech partially because of  how they have handled the whole Teekay Offshore scenario. In this situation their hands are tied with their ability to get their equity out being connected with the preferred shares. I also have some confidence with the involvement of Bulldog Investors on this one.

[johnny]

new bull thesis: well our prefs haven't paid out for years, but on the bright side there are some massive debt maturities coming up

[petec]

Anyone still watching this at $10?