Brookfield Renewable Partners: A New 5.25% Preferred Units IPO
Summary
- The Brookfield Renewable Partners' new preferred unit, BEP-A, is trading above its par value.
- BEP is one of the Brookfield Asset Management's subsidiaries.
- BEP-A has the third highest current yield in the sector.
- Comparison with all other "BBB-" rated preferred stocks and units that pay a fixed dividend rate.
- Schedule K-1.
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Introduction
A new series of Preferred Units, issued by Brookfield Renewable Partners (NYSE:BEP), a subsidiary of Brookfield Asset Management (BAM), is coming to the market. Just several days after another BAM's subsidiary, Brookfield Property Partners issued its Series 3 Preferred Units, BPYPN. In fact, for the last year, from a total of 6 series of preferred units IPOs, 4 belong to BAM's partnerships. In this article, we want to shed light on the newest exchange-traded Preferred Units issued by Brookfield Renewable Partners.
The New Issue
Before we submerge into our brief analysis, here is a link to the 424B5 Filing by Brookfield Renewable Partners LP - the prospectus.
Source: SEC.gov
For a total of 8M units issued, the total gross proceeds to the company are $200M. You can find some relevant information about the new preferred units in the table below:
Source: Author's spreadsheet
Brookfield Renewable Partners L.P. 5.25% Class A Preferred Limited Partnership Units, Series 17 (NYSE: BEP-A) pay a fixed dividend at a rate of 5.25%. The new preferred units carry a 'BBB-' S&P rating and are callable as of 03/31/2025. Currently, the new issue trades a little above its PAR, at a price of $25.12. This translates into a Current Yield of 5.22% and Yield-to-Call of 5.14%.
Here is how the stock's YTC curve looks like right now:
Source: Author's spreadsheet
The Company
Brookfield Renewable Partners operates one of the world's largest publicly-traded renewable power platforms. Its portfolio consists of over 19,000 MW of capacity and 5,274 generating facilities in North America, South America, Europe and Asia. Its investment objective is to deliver long-term annualized total returns of 12%-15%, including annual distribution increases of 5-9% from organic cash flow growth and project development. It has an established track record of creating value by prudently acquiring, building and financing assets, and actively managing its operations.
The company is a global leader in hydroelectric power, which comprises approximately 74% of its portfolio. It is also an experienced owner, operator and investor of global wind, solar, distributed generation, and storage facilities.
Source: The company's website | Overview
Below, you can see a price chart of the common stock, BEP:
Source: Tradingview.com
Quite an impressive performance by BEP, after it has recorded 127% gain since the start of 2019. The company's last declared quarterly dividend (payable on March 30) is $0.543, which translates into an annualized payout of $2.172. With a market price of $56.86, the current yield of BEP is at 3.82%. As an absolute value, this means it pays $388.67M in dividends yearly. For comparison, the yearly dividend expenses for the newly issued Series 17 Preferred Units are around $68.9M.
In addition, with a market capitalization of around $10.19B, BEP is one of the largest companies (and the second non-US) in the "Diversified Utilities" sector (according to Finviz.com).
Capital Structure
Below you can see a snapshot of Brookfield Property Partners LP's capital structure as of its Quarterly Report in September 2019. You can also see how the capital structure evolved historically.
Source: Morningstar.com | Company's Balance Sheet
As of Q3 2019, BEP had a total debt of $10.24B ranking senior to the newly issued preferred units. The new Series 17 preferred units rank junior to all outstanding debt and equal with the other preferred units of the company that totals $830M.
The Ratios Which We Should Care About
Our purpose today is not to make an investment decision regarding the common stock of BEP but to find out if its new preferred stock has the needed quality to be part of our portfolio. Here is the moment where I want to remind you of two important aspects of the preferred stocks compared to the common stocks.
- Preferred shareholders have priority over a company's income, meaning they are paid dividends before common shareholders.
- Common stockholders are last in line when it comes to company assets, which means they will be paid out after creditors, bondholders, and preferred shareholders.
Based on our research and experience, these are the most important metrics we use when comparing preferred stocks:
- Market Cap/(Long-term debt + Preferreds): This is our main criterion when determining credit risk. The bigger the ratio, the safer the preferred. Based on the latest annual report and taking into consideration the latest preferred issue, we have a ratio of 10,190/(10,240 + 1,030) = 0.90, showing a very good ratio, as the company's liabilities is slightly more than its equity.
- Earnings/(Debt and Preferred Payments): This is also quite easy to understand approach. One can use EBITDA instead of earnings, but we prefer to have our buffer in what is left to the common stockholder. The higher this ratio, the better. The ratio with the TTM financial results is 100/(690 + 69) = 0.13, indicating a very poor coverage of its preferreds and debt payments coverage.
The Brookfield Family
There are 5 more exchange-traded preferred stocks issued by a Brookfield partnership:
- Brookfield Property REIT Inc. 6.375% Preferred Shares Series A (BPYUP)
- Brookfield DTLA Fund Office Trust Investor Inc., formerly MPG Office Trust Inc., formerly Maguire Properties Inc., 7.625% Series A Cumulative Redeemable Preferred Stock (DTLA.P)
- Brookfield Property Partners L.P. 6.50% Class A Cumulative Redeemable Perpetual Preferred Units, Series 1 (BPYPP)
- Brookfield Property Partners L.P. 6.375% Class A Cumulative Redeemable Perpetual Preferred Units Series 2 (BPYPO)
- Brookfield Property Partners L.P. Class A Cumulative Redeemable Perpetual Preferred Units Series 3 (BPYPN)
Source: Author's database
3 of these issues (BPYPP, BPYPO, and BPYPN) belong to Brookfield Property Partners (a subsidiary of Brookfield Asset Management) and the other two (BPYUP and DTLA-P) belong to two subsidiaries of Brookfield Property Partners. BPRAP was inherited from General Growth Properties, Inc. as part of the acquisition by Brookfield Property Partners, which was later transformed into Brookfield Property REIT. DTLA-P is derived from the acquisition of MPG Office Trust in October 2013, and it has not paid any distribution since November 1, 2008. A small exception is one payout in 2015 of $2.25 per share but there is still a large amount of accumulated dividends.
Despite the differences in the sector and the S&P rating, still, the most suitable form comparison with the newly issued Preferred Units, are the three issues of BPY:
Source: Author's database
BPYPP, BPYPO, and BPYPN also pay a fixed dividend, at a rate of 6.50%, 6.375%, and 5.75%, and are rated with a "BB+" by Standard & Poor's. From them, BPYPP is the only that is trading above its par value, meaning its Yield-to-Worst is equal to its Yield-to-Call, while the other two, BPYPO and BPYPN, are trading below their PAR and their YTW is their Current Yield. With YTW of 5.14%, BEP-A has the lowest return of the group, also having the lowest nominal yield. However, this can be expected given that BEP-A is an investment-grade issue, while the BPY's units are below-investment-grade ones.
Sector Comparison
The image below contains all preferred stocks and units that pay a fixed interest rate issued by a Utility.
Source: Author's database
It should be noted that PG&E (PCG) suspended the dividend on its preferred stocks beginning Jan. 31, 2018. Yet, their dividends are cumulative, and the reason for their suspension at this time is not the solvency of the company. At the end of the day, a suspended dividend means that we are not getting our money on time, and the time value of money does matter to us. Furthermore, on Jan. 29, 2019, the company has filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the Northern District of California.
The following bubble chart presents the rest of the preferred stocks of the group by their % of Par and Current Yield:
Source: Author's database
Except for SR-A and DUK-A that have a little higher Current yield, the rest of the non-suspended preferred stocks give a lower return, and in that respect, the newly issued preferred units seem slightly undervalued.
All 'BBB-' Preferred Stocks
This section contains all preferred stocks and units that pay a fixed dividend rate, have a par value of $25, a 'BBB-' Standard & Poor's rating, and positive Yield-to-Call. The first chart is presented by Yield-to-Call and Current Yield of the securities.
Source: Author's database
To see how the real Yield curve of these securities looks, we'll have to include two more conditions: the preferred stocks don't have to be callable and have to trade above par value. The next chart will present the BBB- preferred stocks by their Years-to-Call and Yield-to-Call:
Source: Author's database
All Preferred Stock Units
The chart below contains all preferred stocks and units with Schedule K-1 with non-suspended distribution, by their Yield-to-Call and Current Yield.
Source: Author's database
Furthermore, for a better idea, SPLP-A is also excluded from this chart, as its Yield-to-Call is 205%.
Schedule K-1
We have agreed to use commercially reasonable efforts to provide on our website, within 90 days after the close of each calendar year, U.S. tax information (including IRS Schedule K-1), which describes on a U.S. Dollar basis your share of the Partnership's income, gain, loss, and deduction, if any, for our preceding taxable year. In addition, the Partnership will provide an IRS Schedule K-1 to any holder of Series 17 Preferred Units that furnishes the Partnership or its agents with certain basic information regarding such holder's Series 17 Preferred Units.
Source: 424B5 Filing by Brookfield Renewable Partners LP
Special Optional Redemption
- Optional Redemption Upon a Ratings Event
If a Ratings Event occurs prior to March 31, 2025, the Units may be redeemed at the Partnership's option, in whole but not in part, within 120 days of the occurrence of such Ratings Event, at a price of $25.50 per Unit (102% of the liquidation preference), plus an amount equal to all accumulated and unpaid distributions thereon to, but excluding, the date fixed for redemption, whether or not declared.
- Optional Redemption Upon a Change in Tax Law
The Partnership will have the option to redeem all but not less than all of the Units at a redemption price of $25.00 per Unit, if as a result of a Change in Tax Law, there is, in the Partnership's reasonable determination, a substantial probability that the Partnership or any Successor Entity would become obligated to pay any additional amounts on the next succeeding distribution payment date with respect to the Units and the payment of those additional amounts cannot be avoided by the use of any reasonable measures available to the Partnership or any Successor Entity.
Source: FWP Filing by Brookfield Renewable Partners LP
Use of Proceeds
We will use the net proceeds from this offering to subscribe for Series 17 BRELP Mirror Units (as defined in "Description of the Offered Securities - Description of Series 17 Preferred Units - Series 17 BRELP Mirror Units") that are designed to mirror the economic terms of the Series 17 Preferred Units. We intend to allocate an amount equal to the net proceeds from this offering to finance and/or refinance investments made in renewable power generation assets or businesses, and to support the development of clean energy technologies, that constitute Eligible Investments (as defined in "Use of Proceeds")). Pending the allocation of an amount equal to the net proceeds of the Series 17 Preferred Units to finance or refinance Eligible Investments, the unallocated portion of the net proceeds may be temporarily used for the repayment of our outstanding indebtedness.
Source: 424B5 Filing by Brookfield Renewable Partners LP
Addition to the iShares Preferred and Income Securities ETF
With the current market capitalization of the new issue of around $200M, BEP-A is a possible addition to the ICE Exchange-Listed Preferred & Hybrid Securities Index during some of the next rebalancings. If so, it will also be included in the holdings of the main benchmark, the iShares Preferred and Income Securities ETF (PFF), which is the ETF that seeks to track the investment results of this index, and which is important to us due to its influence on the behavior of all fixed-income securities.
Conclusion
The price chart of the common stock, BEP, looks superb after the market capitalization has increased more than 2x for the last little more than a year. Thus, Market Cap/(Long-term debt + Preferreds) coverage looks decent with a ratio of close to 1. Also, BEP's common stock is paying almost 6x more dividends than its issued preferred units, so it has a kind of buffer that protects the unitholders. In terms of yields, BEP-A has a Current Yield of 5.22% that puts it at the top in the sector comparison bubble chart, after only SR-A and DUK-A, gives higher CY, although it is the only one dealing with K-1. As for the comparison with all other "BBB-" preferred stocks and units, BEP-A has one of the highest YTW from the group. However, AHL-E and ATH-B have 0.30% higher YTW (equal to their Yield-to-Call) from the new IPO, being clearly above the Yield curve.
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This article was written by
Arbitrage Trader, aka Denislav Iliev has been day trading for 15+ years and leads a team of 40 analysts. They identify mispriced investments in fixed-income and closed-end funds based on simple-to-understand financial logic.
Denislav leads the investing group Trade With Beta, features of the service include: frequent picks for mispriced preferred stocks and baby bonds, weekly reviews of 1200+ equities, IPO previews, hedging strategies, an actively managed portfolio, and chat for discussion. Learn more.Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (8)
The fundamentals are very clear - and I say that as one who has been in the energy field my entire life. My oil and fossil fuels investments have been doing terrible for many years. Renewables are now cheaper than coal or nuclear.
So, perhaps instead of using "Trump Deplorable Words" you could speak English and tell us why millions of people want to buy Teslas and use cheaper renewable power?
Are these people just snowflakes....while "Real Man" get 10MPG in a GM honking SUV?
Logic is hard. But see if you can look up the lifetime costs of hydro and current PV and compare them to Nuclear or Oil. Let us know what logic and reason show, snowflakes aside.