Corporate Office Properties Trust (OFC) issued 6MM shares of a new Series L preferred stock, taking advantage of lower rates and the ability to extend the duration of their liabilities while they restructure their property portfolio.
Details of the offering are (prospectus):
|Issuer||Corporate Office Properties|
|Ticker||OFC PrL or OFC-L (OTC )|
|Shares||6,000,000 (900,000 greenshoe)|
|Dividends||Cumulative. Paid quarterly Jan, April, July and Oct 15th|
|Optional Redemption||June 27, 2017|
|Special Optional Redemption||Conversion option upon change of control if company does not elect to redeem at par.|
|Voting Rights||Right to elect 2 members of the board of directors after 6 missed quarters|
|Use of Proceeds||To repay certain indebtedness under their unsecured revolving credit facility and for general corporate purposes, including potential future full or partial repurchases or redemptions of our outstanding preferred shares.|
The underwriting discount on the offering is $0.95, so it is reasonable to expect a nice discount to par prior to trading.
Corporate Office Properties Trust ("COPT") is an office REIT that focuses primarily on serving the specialized requirements of strategic customers in the United States Government and defense information technology sectors. COPT acquires, develops, manages and leases office and data center properties that are typically concentrated in large office parks primarily located adjacent to government demand drivers and/or in office markets that should possess growth opportunities. As of March 31, 2012, their investments in real estate included the following:
- 231 operating office properties totaling 20.2 million square feet;
- seven office properties under construction or redevelopment that we estimate will total approximately 903,000 square feet upon completion, including two partially operational properties included above;
- land held or under pre-construction totaling 2,327 acres (including 583 controlled but not owned) that we believe are potentially developable into approximately 20.5 million square feet; and
- a partially operational, wholesale data center which upon completion and stabilization is expected to have a critical load of 18 megawatts.
The following table shows the relative value versus such peers as"
- Brandywine Realty Trust (BDN),
- Government Properties Income Trust (GOV),
- Boston Properties Inc (BXP),
- Monmouth REIT (MNR),
- CapLease Inc (LSE).
If the proceeds are used to retire existing preferreds, I would assume that the first on the list would be the OFC-Gs (2,000,000 shares issued for gross proceeds of $50MM) as they have an 8% coupon and are currently callable. The trade would save 62.5bps or $312k/yr in dividend costs. Given the underwriting discount of $5.7MM, however, the breakeven on the trade would be 18yrs. A more functional use of proceeds is either property development or paying down banks to increase liquidity.
While the equity was included in the relative value to show the yield pickup of the preferred and the equity dividend versus peers, a snapshot of the equity is helpful to see how another portion of the capital structure is priced.
Bottom Line: While the equity does not look compelling, there is a story behind it (which is another article entirely) and going forward might be compelling. That said, the preferred stock is compelling relative to the company's existing preferred stock (which is callable) with the possible exception of the OFC-G (the highest rate in the complex) and the preferred stocks of other unrated REITs. The business model - government defense focused differentiates the company from their office and datacenter peers.
Additional disclosure: This article is for informational purposes only, it is not a recommendation to buy or sell any security and is strictly the opinion of Rubicon Associates LLC. Every investor is strongly encouraged to do their own research prior to investing.