DTLA - DTLA Holdings

[COBFInfinity]

Has anyone gained insight from Bulldog?  From credible market sources I've heard that B is not going to pay .

 

Pay when? Ever?

[COBFInfinity]

While I wait for SugarRE to hopefully respond, I just want to get back to the simple "money talks" argument. I know Brookfield (among others) has had some examples of screwing over preferred shareholders in various deals over the years, but do their actions on this particular deal support that pessimism?

 

Let's go back to the MPG buyout. They tendered for ALL of the preferred shares at $25 when liquidation value was $32 or so. They ended up getting just a small amount because the market price stayed above $25. If they intended to screw preferred shareholders all along, they would not have done this. Preferreds didn't have any votes in the merger; they were helpless. It seems clear that Brookfield wanted to retire the preferreds because they present an obstacle to getting dividends/liquidation proceeds to common shareholders at some point. Of course, Brookfield was only willing to buy them at a discount at that point.

 

Having only gotten a small amount of preferreds in the tender, did Brookfield THEN come up with the idea to screw preferred shareholders? No, quite the opposite. Shortly after, they put something like $190 million of their own money into a parallel series of preferred stock that only gets paid if the publicly traded preferred gets paid.

 

Preferred shareholders sued the company. In an October 2015 affidavit from the CFO G. Mark Brown, he stated that it was likely the preferred dividends would be paid within 8 years. Call it a a coincidence, but that is the October 2023 date at which Brookfield's co-investors can cash out for the first time. The affidavit also makes several other comments that are consistent with basic capital structure that we all know, preferred has priority over payment of common (https://www.ktmc.com/files/6066_2015-10-14_Affidavit_of_G._Mark_Brown.PDF). Now, I guess you could argue that he was lying about the intent to pay, but recall at the time that they had just sunk their own $190 million in two years earlier.

 

Brookfield has chosen to say very little about the preferreds ever since. The SEC filings always say "they may never pay dividends" and nothing more. However, Bulldog bought in, got on the board, and has had positive signaling in it's shareholder reports for several years. If they had any reason to think they were going to get screwed, wouldn't they resign from the board and sell? Yet, the Special Opportunities Fund hasn't sold any shares as of 3/31/20.

 

So while the coronavirus may have upended whatever the gameplan was, I still see the shared alignment in ownership and the priority of preferred over common as a compelling argument that the preferred gets paid eventually. I think it's perfectly reasonable to assume that the date has been pushed back by recent events, but absent insolvency (which I acknowledge is possible at some point), it just doesn't make sense to me to say they never get paid. I'm certainly open to opposing viewpoints, but I don't think I've really heard any good ones in the past few years, to be honest. I completely accept the argument that they aren't going to pay right now, but I've always viewed October 2023 is the likely catalyst anyway. Maybe it's October 2028 now - run your IRR numbers on $16 today and a $60 liquidation value in October 2028 and tell me if that meets your return hurdle (again, this assumes solvency).

[BG2008]

I'm a small bag holder.  You maybe right.  You maybe wrong.  I have learned that I am tired of dealing with Oaktree and Brookfields.  Guys who do distressed investing for a living will sell their mothers to the devil if they can get a buck.  Sure the 2028 IRRs looks great on paper.  But if you probability adjust that, yes yes, I know value investing is dealing with the emotional non-sense.  But I much prefer to deal with people who are shareholder friendly. 

[COBFInfinity]

I'm a small bag holder.  You maybe right.  You maybe wrong.  I have learned that I am tired of dealing with Oaktree and Brookfields.  Guys who do distressed investing for a living will sell their mothers to the devil if they can get a buck.  Sure the 2028 IRRs looks great on paper.  But if you probability adjust that, yes yes, I know value investing is dealing with the emotional non-sense.  But I much prefer to deal with people who are shareholder friendly.

 

I don't disagree in general, but in this particular case they have to screw themselves to screw us. Does that carry no weight?

[sundin]

The inevitable refi of debt in the near future may further signal what Brookfield is thinking.

 

I get that pref present less risk but if you are paying 7.6% preferred dividends and can refi with 2.5% debt - you do that. Open up cash flow and lower overall cost of capital.

 

 

 

[SugarRE]

I'm familiar with some of the players in the LA private real estate community, so was passing along the general feel of a conversation I've had with someone familiar with the portfolio.  And to be fiar, much of my research on this topic has been second hand review of work done.

 

And yes, it was communicated to me that they were not going to bring the prefs current.  I was not a first party to the conversation, so did they mean they were going to drag it out as long as possible?  Who knows.  Do they want to get paid on their equity from the purchase?  Obviously.

[SugarRE]

And also to be fair, I personally (in line with BG) don't love the risk of waiting for others to be shareholder friendly.  There are too many other fish in the sea.  That said I hold a small position.

[Seth Lowry]

From my (jaded) perspective, stay away. They're opportunistic with minority holders and will play zero sum games.

 

Crookfield could fix this story in 2 seconds IMO. I'm not as close to this story but it seems they could simply lay out a public long-term strategy, commit to business and financial KPIs, then do a PIPE with participation rights with existing holders - pretty easy stuff IMO. But they're not and they won't - why? They likely sense an opportunity to juice their returns.

 

Crookfield loves to play the waiting game if they sense any opportunity.  I don't know what they could be playing for, but I would suggest thinking about inverting the alignment argument on prefs being structurally senior -  what decent capital allocator/manager lets a story like this flap in the wind for this long?? 

 

Maybe Crookfield have a playbook to structurally subordinate prefs, maybe they're happy earning lower returns on less capex even though DTLA may need $ (sometimes Brookfield, especially DaughterCo's struggles to allocate money for projects that don't meet typical huge PE return thresholds), maybe they just want to see if Bulldog stays in business or folds and they can buy the block at a discount...idk stuff like this.

 

I wouldn't put too much stock in a CFO's comments either. Will Brookfield managers and board lie? Yes. To the public, to your face, and likely to their own mothers :).  Who even knows if that CFO will be there and not be replaced by a rubber stamping crony (another time tested Crookfield tactic).

 

Anyways, I'm only writing this PSA because I hate to see value guys lose on governance stuff. Let the indexers and robinhooders get swindled by these wolves in sheep clothing. I have no position long or short

 

Remember #me$TOO2019 BG2008  -never forget haha

 

(I was aiming for a little satire/comedy with this post and not pure rage fwiw)

[realassetsvalue]

Silverstein rumored to be in advanced talks to buy US Bank tower from OUE:

 

Pricing rumored to be $425m - $450m, which implies ~$325 PSF. OUE bought it for $367.5m / $275 PSF and put $50m / $35 PSF of CAPEX into the property. Reported asking price in January 2020 was $700m / $500 PSF, which was probably ambitious, but if this price is right, that implies a heavy discount of about 30% from the comparable in this article, which was in 2017 at $460 PSF: http://www.ladowntownnews.com/news/u-s-bank-tower-up-for-sale/article_1cee7c28-1da2-11e9-84be-0fa9eed42903.html

 

At $325 PSF, that implies an enterprise value of about $2.5 billion which is ~$5 per preferred share by my math. At $350 PSF, c. $15 per preferred share. It trades today at about $16 a share.

 

 

[thepupil]

 

 

Brookfield Property Partners has secured a $305 million refinancing package for Ernst & Young Plaza, a 41-story, 940,000-square-foot office tower in Downtown Los Angeles.

 

The $275 million senior loan and $30 million in mezzanine debt were both originated by Morgan Stanley and Wells Fargo last week. Details of the deal were disclosed in a pre-sale report from Kroll Bond Rating Agency for the single-borrower CMBS deal named BFLD 2020-EYP, whose collateral is the senior loan.

 

 

The new debt will replace a $265 million balance-sheet loan previously provided by Wells Fargo, and return $15 million in equity to the borrower “for working capital purposes,” according to the report. Loan proceeds will also be used to establish a $15.1 million reserve for tenant improvements and leasing costs and a $6.3 million reserve for outstanding free rent.

 

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Brookfield fully controls and owns a 47.5-percent stake in the borrowing entity. The remaining ownership is evenly split between two unnamed sovereign wealth funds and a pension fund.

 

The financing carries an initial term of two years, with three one-year extension options. The interest rate on the senior debt is LIBOR plus 2.86 percent, while interest on the mezzanine debt is LIBOR plus 6.85 percent.

 

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A spokesperson for Brookfield said the firm secured financing for the tower after it recently completed a lease renewal with Pillsbury law firm “and secured new long term leases with Clune Construction and California Fair Plan.”

 

READ MORE

2017: Ernst & Young renews 120k sf lease at Brookfield’s EY Plaza in DTLA

More details emerge about Brookfield’s 64-story DTLA tower

Here’s how much tenants are paying at One Manhattan West

The tower’s eponymous Big Four accounting firm, Ernst & Young, is the largest tenant at the property with more than 120,000 square feet. The tenant that pays the most base rent, meanwhile, is the U.S. government — specifically the Secret Service, which has 94,000 square feet at the property.

 

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The property is now 78.4 percent leased to 43 tenants, down from an occupancy rate of 91 percent in 2018. The decline was mainly due to the departure of one large tenant, Lockton Insurance, in 2019.

 

Ernst & Young is also one of the largest tenants at Brookfield’s newly-opened office tower on the East Coast, One Manhattan West, where it has more than 636,000 square feet. That property recently received a $1.8 billion refinancing itself, including a $1.5 billion single-borrower CMBS deal that attracted massive investor interest.

[thepupil]

i think it speaks to the (current) strength of the financing market for office that a 78% occupied doing $26/foot rent can do a refi at $324 debt/foot at L+286 on the senior.

 

Looks like they got some new tenants though and were able to de-risk some of the existing.

 

A spokesperson for Brookfield said the firm secured financing for the tower after it recently completed a lease renewal with Pillsbury law firm “and secured new long term leases with Clune Construction and California Fair Plan.”

[SugarRE]

I'm more of an asset valuation person so some of the structuring nuances can get lost on me bu the below from the recent 10k was a bit scary. I didn't diligently check if it was in prior 10ks.  And I only took my favorite section.

 

Brookfield DTLA’s subsidiaries have issued, and may in the future issue, equity securities that are senior to the equity interests of such subsidiary that are owned, directly or indirectly, by the Company. The respective organizational documents of Brookfield DTLA and its subsidiaries generally do not restrict the issuance of debt or equity by any of Brookfield DTLA’s subsidiaries, and

any such issuance may adversely impact the amount of funds available to Brookfield DTLA for any purpose, including for dividends or other distributions to holders of its capital stock, including the

Series A preferred stock. As part of the transactions immediately following the consummation of the merger with MPG, subsidiaries of the Company issued equity interests that rank senior to the equity securities of such subsidiaries held indirectly by Brookfield DTLA, and as a result, effectively rank senior to the Series A preferred stock. Additionally, at the time of the merger with MPG,

DTLA Holdings made a commitment to contribute up to $260.0 million in cash or property to New OP, for which it will be entitled to receive a preferred return. As of December 31, 2019 and the

date of this report, $44.5 million is available to the Company under this commitment for future funding.

 

The Series B preferred interest in New OP held by DTLA Holdings is effectively senior to the interest in New OP held by Brookfield DTLA and has a priority on distributions senior to the equity securities of such subsidiaries held indirectly by Brookfield DTLA and, as a result, effectively rank senior to the Series A preferred stock. The Series B preferred interest in New OP may limit the amount of funds available to Brookfield DTLA for any purpose, including for dividends or other distributions to holders of its capital stock, including the Series A preferred stock.

Then in the cash flows and notes, it seems as they are using the Series B as a type of a revolver.

 

[COBFInfinity]

Another cash-out refi. Lenders don't seem to be too concerned about property values.

 

https://therealdeal.com/la/2021/01/27/brookfield-lining-up-465m-refi-for-gas-company-tower-in-dtla/