In the last edition of PrefLetter I pointed out a significant inversion in the floating rate sector, with BPO Properties Ltd. Fltg Rate Pr Series “J”, for instance (BPP.PR.J) trading at a higher price than Brookfield Asset Management Inc Cl A Pr Ser 13 (BAM.PR.K), despite the latter’s higher credit rating.

DBRS notes:

BPO’s debt-to-gross book value could increase to closer to 50% to 55% over the next two years from 44% currently. EBITDA interest coverage is likely to decline prior to Bay-Adelaide coming online in mid-2009, but is expected to remain close to 2.5 times including capitalized interest, which is acceptable for the current rating. Fixed-charges coverage should remain manageable at close to two times. Excluding capitalized interest, EBITDA interest coverage should remain above three times.

Over the short term, BPO should continue to benefit from stronger office markets looking forward which could drive growth in cash flows to support EBITDA interest coverage ratios. Net rental rates in Calgary have experienced unprecedented growth of approximately 50% over the past two years to $35 to $40 per square foot. BPO’s in-place rents are on average 25% to 30% below current market net rents, partly due to long-term leases.

The rating also reflects the following factors: (1) BPO has greater diversification with the addition of new markets in Ottawa and Edmonton in recent years that enhance cash flow stability. (2) BPO’s solid tenant profile and average lease maturity of seven years is expected to support cash flow stability.

It’s a nice little company - and according to note 10 of their 2007 Annual Report, all the debt is secured by individual properties and is non-recourse to the company. This is a nice provision; I like this provision. Each property can hurt them, certainly, in the event of disastrous market conditions, but no single property can take out the company.

The problems are the same as with every other property company … rents can go to zero, or negative (you have to pay the janitor!) for years while the mortgage still needs to be paid … and I would be a lot happier if they weren’t so concentrated in Toronto & Calgary. But they do a good job of mitigating these risks with long leases and well-staggered mortgage maturities.

BPO Properties is 89% controlled by Brookfield Asset Management … this sort of subsidiary action can be a chancy thing.