QHLHA - Quayside Holdings Pref Shares

Anyone looked at these? Best value fixed interest investment on the NZX IMO. Currently trading at 86c, you get a 6.64% distribution. So running yield at current prices around 7.5%.

As a reminder, Quayside Holdings is the investment arm of the Bay of Plenty Regional Council, major assets being Port of Tauranga majority stake and other local real assets.
Ultimate risk of these notes is therefore equivalent to council so AA+.

However the kicker is that the BOP Regional Council are currently consulting to reduce their stake in Port of Tauranga. Should this happen, Quayside Holdings are required to redeem the notes at par. This juices up the projected return over the next couple of years to possibly mid teens as you will get the capital uplift to par possibly in short order.

A similar thing happened to FCGHA which was redeemed at par shortly after trading at 90c.

Risk free 15% p.a in the base case looks pretty good to me.

How likely is it that the shares will be redeemed? "Consulting" sounds pretty early in the process of getting the shares redeemed?

If I understand correctly, at the current bid of $.88 wouldn't that be 7.5% (.0664/.88) yield.

I guess your 15% is based on repayment at $1 at some stage in the future. Although it is a preference share does the share agreement require the shares to be redeemed at $1par value or can they buy them back on market at $.88cents.

If you could be sure of redemption it sounds pretty good, also being stuck at 7.5% is not so bad if interest rates are falling.

My understanding is that preference shares provide a guaranteed dividend but looking at the 2023 Annual report they say the following

The Perpetual Preference Shares have no fixed term and are not redeemable. Holders of Perpetual Preference Shares are entitled to receive Dividends which are fully imputed (or “grossed up” to the extent they are not fully imputed), quarterly in arrears. These dividends are at the discretion of the board of directors.

Are these the same shares? Is there a guarantee of 6.64% on a $1par value?

I guess liquidity would not be an issue for someone as small as me anyway.

Sorry 15% risk free got me excited and brought up some initial questions and I have not done my own research.

"The Perpetual Preference Shares have no fixed term and are not redeemable. Holders of Perpetual Preference Shares are entitled to receive Dividends which are fully imputed (or “grossed up” to the extent they are not fully imputed), quarterly in arrears. These dividends are at the discretion of the board of directors."

That is pretty much the definition of any PPS. Same as the banks PPS issues.
From memory the interest rate is reset every three years (I haven't checked-just saw this thread), in the recent past it has been quite low.
I have owned some of these since inception and topped up 2 or 3 weeks back.
The redemption at par is a possibility, but not something I would base an investment on.

Quote:

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Originally Posted by Grimy

"The Perpetual Preference Shares have no fixed term and are not redeemable. Holders of Perpetual Preference Shares are entitled to receive Dividends which are fully imputed (or “grossed up” to the extent they are not fully imputed), quarterly in arrears. These dividends are at the discretion of the board of directors."

That is pretty much the definition of any PPS. Same as the banks PPS issues.
From memory the interest rate is reset every three years (I haven't checked-just saw this thread), in the recent past it has been quite low.
I have owned some of these since inception and topped up 2 or 3 weeks back.
The redemption at par is a possibility, but not something I would base an investment on.

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Thanks for your input. My read is that it's overwhelmingly likely that Quayside sell down some POT stake in the next couple of years. It's clearly the direction they want to go in and they even reference it in the job ad for the new CIO.

In the near term it's a good interest rate for good credit risk with a free call option on extra return.

Quote:

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Originally Posted by Aaron

How likely is it that the shares will be redeemed? "Consulting" sounds pretty early in the process of getting the shares redeemed?

If I understand correctly, at the current bid of $.88 wouldn't that be 7.5% (.0664/.88) yield.

I guess your 15% is based on repayment at $1 at some stage in the future. Although it is a preference share does the share agreement require the shares to be redeemed at $1par value or can they buy them back on market at $.88cents.

If you could be sure of redemption it sounds pretty good, also being stuck at 7.5% is not so bad if interest rates are falling.

My understanding is that preference shares provide a guaranteed dividend but looking at the 2023 Annual report they say the following

The Perpetual Preference Shares have no fixed term and are not redeemable. Holders of Perpetual Preference Shares are entitled to receive Dividends which are fully imputed (or “grossed up” to the extent they are not fully imputed), quarterly in arrears. These dividends are at the discretion of the board of directors.

Are these the same shares? Is there a guarantee of 6.64% on a $1par value?

I guess liquidity would not be an issue for someone as small as me anyway.

Sorry 15% risk free got me excited and brought up some initial questions and I have not done my own research.

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Prospectus is here:

https://quaysideholdings.co.nz/wp-co...-Statement.pdf

There's a procedure for vote to put them back to the Council at par if they miss a distribution payment.

2008. I've had them a while....
Yes, rate reset is 3-yearly.
Since inception the rate has been set at 5.42% - 5.88% - 4.32% - 2.46% - 6.64%.
My average is 88 cents (bought the bulk of them at 85 cents in 2012), so yes, currently just over 7.5%.
By no means a stellar performer, but a sleep easy one and a redemption at par would help the numbers.

Many thanks for the information.

I don't know that I understand the dividend calculation formula. The 3 year swap rate + a margin (that is not very clear) reduced by 1-taxrate and finally increased by 25%.

I guess they have reset fairly recently as the 3 year swap rate per interest.co.nz was nothing in 2020.

With a formula to calculate yield and you will get a minimum $1 if redeemed, and if Legoman is right about the result, if a distribution is missed this is not that scary.

My first thought being risk averse was that in a crisis, directors could cancel the dividend and you would have no one to sell to, to free up capital but that is obviously wrong.

Redemption aside, as the yield on these move with interest rates (3 yearly) I would have thought a long term corporate bond at a similar or higher yield would provide potential capital appreciation if interest rates get slashed in the next crisis. Conversely this would beat the long term bond if interest rates rise.

Which way are interest rates going to go? A 30 year trend down might be hard to break.

I would note that I have also been afraid to buy long term bonds as well as I worry about liquidity in a crisis and the erosion of purchasing power through inflation. Not sure why I am posting really as for me at this stage it is all theoretical. I guess 15% risk free got me going.

Funnily enough, today I have received from Quayside a sheet with the terms and conditions of the Perpetual Preference Shares. No cover letter-just the summary of principal terms.
Which as a holder I already have.
It's almost as though they are priming holders for an announcement. Or the possibility of an announcement.......

Quote:

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Originally Posted by Grimy

Funnily enough, today I have received from Quayside a sheet with the terms and conditions of the Perpetual Preference Shares. No cover letter-just the summary of principal terms.
Which as a holder I already have.
It's almost as though they are priming holders for an announcement. Or the possibility of an announcement.......

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Random. Trading at 91c now too so a nice IRR for recent buyers. And that's despite market yields having risen recently.

Yes. Looks like it was good buying a few weeks back.

https://quaysideholdings.co.nz/2024/...r-sam-newbury/

Quayside has announced the appointment of Sam Newbury to the role of Chief Investment Officer (CIO), transitioning from an acting position, effective immediately.
As one of the longest-standing Quayside employees, Sam joined Quayside in 2018 and has been integral in the establishment of several investments within the portfolio to date. A constant within the investment team, Sam brings a level of stability in what has been a very undulating couple of years as we’ve navigated through COVID-19, Cyclone Gabrielle and a challenging economic and geopolitical landscape.
Sam has facilitated mergers, acquisitions, asset management, valuations, divestment, and strategy implementation, not to mention the intimate involvement he has had in several Bay of Plenty local investments, including establishing Quayside’s stake in Tauranga Crossing and the Hamilton Street Panorama Towers joint ventures.
Quayside’s investment mandate has been the perfect fit for the breadth and depth of experience Sam provides. His experience across multiple markets and asset classes, from private equity to direct investments and the real asset property portfolio, alongside his commercial acumen provides value to the organisation.
A rigorous recruitment process ensured a strong appointment, balancing internal capability with the market. Sam’s appointment supports Quayside’s desire to nurture employee aspirations and ensure people feel valued and supported in their career paths.
“Growing and investing in our people is incredibly important to us. Succession of such a significant role isn’t a given, and this appointment acknowledges the hard work Sam has put in over his six-year tenure with Quayside, he thoroughly deserves it”. Says Lyndon Settle, Quayside CEO.
The appointment offers an opportunity to shape the future investment strategy and portfolio allocation, whilst maintaining a clear line of sight to our shareholder (Bay of Plenty Regional Council) expectations and delivering on the strategic purpose of growing a responsible and diversified fund, that generates long-term returns that supports prosperity for the Bay of Plenty.

Thanks for posting LM

Quote:

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Originally Posted by Grimy

Thanks for posting LM

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No problem - this is also quite an interesting page:

https://www.participate.boprc.govt.nz/long-term-plan-2024-2034/whether-sell-some-port-tauranga-shares

From the PWC report:

PPS is now a relatively expensive source of financing - repayment would
save $9m p.a. in interest costs (net of tax imputation credits)

Another factor that is limiting QHL’s capacity to fund a higher distribution to Council is the costs associated with
the PPS. These have grown significantly following the recent tri-annual base rate reset. The Financial Model
assumes that the PPS after tax benefits are now greater than POT generates in returns (6.6% PPS cost vs 3%
dividend + 3% capital growth).

Repaying the PPS (which is required if QHL reduces its POT shareholding below 50.1%), is expected to deliver
a material interest cost saving to QHL. Based on the Financial Model assumptions, an additional ~$9 m p.a. of
free cash flow is generated (post the adjustment for the PPS tax imputation credits), which is equivalent to 17%
and 10% of POT’s forecast dividend to QHL in FY24 and FY36, respectively.

Thanks again LM.
Interesting that if they sell down to under 50% they will consider the future repayment of the PPS, not definitely pay them back.
I am guessing they probably would because of the 9 million saving they mention, but hey, you never know.
Will happily sit on my 6.64% and see how things play out.
I may even buy a few more........

Quote:

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Originally Posted by Grimy

Thanks again LM.
Interesting that if they sell down to under 50% they will consider the future repayment of the PPS, not definitely pay them back.
I am guessing they probably would because of the 9 million saving they mention, but hey, you never know.
Will happily sit on my 6.64% and see how things play out.
I may even buy a few more........

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Yes "consider" is odd wording given the PDS, i suspect they did that out of concern for their continuous disclosure obligations.

The PWC report itself states that the PPS would be repaid for a selldown to under 50%. The assumption is also that this all takes place in Q4 this year.

Anyway at 92.5 they are less of a raging buy than they were at 85-86, nevertheless i would buy more if they dropped back towards 90c.

On June 28, 2023, S&P Global Ratings revised the outlook on its long-term rating on Bay of Plenty Regional Council, a New Zealand local government, to negative from stable. "Rising interest costs, including Quayside Holdings Ltd.'s perpetual preference share dividends, and inflationary pressures will narrow operating margins for the New Zealand local government".

Credit rating is the driving force behind the Bay of Plenty Regional Council's desire to sell down Port of Tauranga's shareholding to 28%.

I couldn't help myself and bought a few more, so sitting on around 7.5% return and waiting to see what happens.....