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RBC Capital Markets®
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Filed Pursuant to Rule 433
Registration Statement No. 333-227001
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The information in this preliminary terms supplement is not complete and may be changed.
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Preliminary Terms Supplement
Subject to Completion:
Dated February 8, 2019
Pricing Supplement Dated February __, 2019 to the
Product Prospectus Supplement ERN-ETF-1 Dated September 11, 2018, Prospectus Supplement Dated September 7, 2018, and
Prospectus Dated September 7, 2018
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$ __________
Buffered Enhanced Return Notes
Linked to the iShares® U.S. Real Estate
ETF, Due February 26, 2021
Royal Bank of Canada
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Royal Bank of Canada is offering the Buffered Enhanced Return Notes (the “Notes”) linked to the performance of the iShares® U.S. Real
Estate ETF (the “Reference Asset”).
The CUSIP number for the Notes is 78013XZJ0. The Notes do not pay interest. The Notes provide a 150% leveraged positive return if the share price of
the Reference Asset increases from the Initial Level to the Final Level, subject to the Maximum Redemption Amount of 120% of the principal amount of the Notes. Investors will lose 1% of the principal amount of the Notes for each 1% decrease from
the Initial Level to the Final Level of more than [30.50% - 32.00%] (to be determined on the Trade Date). Any payments on the Notes are subject to our credit risk.
Issue Date: February 28, 2019
Maturity Date: February 26, 2021
The Notes will not be listed on any securities exchange.
Investing in the Notes involves a number of risks. See “Risk Factors” beginning on page S-1 of the prospectus supplement dated September 7, 2018,
“Additional Risk Factors Specific to the Notes” beginning on page PS-6 of the product prospectus supplement dated September 11, 2018, and “Selected Risk Considerations” beginning on page P-6 of this terms supplement.
The Notes will not constitute deposits insured by the Canada Deposit Insurance Corporation, the U.S. Federal Deposit Insurance Corporation or any other
Canadian or U.S. government agency or instrumentality. The Notes are not subject to conversion into our common shares under subsection 39.2(2.3) of the Canada Deposit Insurance Corporation Act.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined that
this terms supplement is truthful or complete. Any representation to the contrary is a criminal offense.
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Per Note
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Total
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Price to public
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100.00%
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$
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Underwriting discounts and commissions
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0.00%
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$
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Proceeds to Royal Bank of Canada
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100.00%
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$
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The initial estimated value of the Notes as of the date of this terms supplement is $991.40 per $1,000 in principal amount, which is
less than the price to public. The final pricing supplement relating to the Notes will set forth our estimate of the initial value of the Notes as of the Trade Date, which will not be less than $971.40 per $1,000 in principal amount. The actual
value of the Notes at any time will reflect many factors, cannot be predicted with accuracy, and may be less than this amount. We describe our determination of the initial estimated value in more detail below.
If the Notes priced on the date of this terms supplement, RBC Capital Markets, LLC, which we refer to as RBCCM, acting as agent for Royal Bank of
Canada, would not be expected to receive a commission in connection with the sale of the Notes. See “Supplemental Plan of Distribution (Conflicts of Interest)” below.
RBC Capital Markets, LLC
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Buffered Enhanced Return Notes
Linked to the iShares® U.S. Real Estate
ETF
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SUMMARY
The information in this “Summary” section is qualified by the more detailed information set forth in this terms
supplement, the product prospectus supplement, the prospectus supplement, and the prospectus.
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Issuer:
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Royal Bank of Canada (“Royal Bank”)
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Underwriter:
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RBC Capital Markets, LLC (“RBCCM”)
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Reference Asset:
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iShares® U.S. Real Estate ETF. The Reference Asset seeks investment results that correspond generally to the price
and yield performance, before fees and expenses, of the Dow Jones U.S. Real Estate Index (the “Underlying Index”). BlackRock Fund Advisors (the “Advisor”) serves as the investment advisor to the Reference Asset.
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Bloomberg Ticker:
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IYR
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Currency:
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U.S. Dollars
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Minimum Investment:
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$1,000 and minimum denominations of $1,000 in excess thereof
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CUSIP:
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78013XZJ0
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Trade Date (Pricing
Date):
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February 25, 2019
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Issue Date:
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February 28, 2019
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Valuation Date:
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February 23, 2021
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Maturity Date:
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February 26, 2021, subject to extension for market and other disruptions, as described in the product prospectus supplement
dated September 11, 2018.
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Payment at Maturity (if
held to maturity):
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If, on the Valuation Date, the Percentage Change is positive,
then the investor will receive an amount per $1,000 principal amount per Note equal to the lesser of:
1. Principal Amount + (Principal Amount x Percentage Change x Leverage Factor) and
2. Maximum Redemption Amount
If, on the Valuation Date, the Percentage Change is less
than or equal to 0%, but not by more than the Buffer Percentage (that is, the Percentage Change is between zero and –[30.50% - 32.00%]) (to be determined on the Trade Date), then the investor will receive the principal amount
only.
If, on the Valuation Date, the Percentage Change is negative,
by more than the Buffer Percentage (that is, the Percentage Change is between –[30.50% - 32.00%] and -100%) (to be determined on the Trade Date), then the investor will receive a cash payment equal to:
Principal Amount + [Principal Amount x (Percentage Change + Buffer Percentage)]
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Percentage Change:
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The Percentage Change, expressed as a percentage, is calculated using the following formula:
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Initial Level:
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The closing share price of the Reference Asset on the Trade Date.
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Final Level:
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The closing share price of the Reference Asset on the Valuation Date.
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Leverage Factor:
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150% (subject to the Maximum Redemption Amount)
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Buffered Enhanced Return Notes
Linked to the iShares® U.S. Real Estate
ETF
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Maximum Redemption
Amount:
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120% multiplied by the
principal amount
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Buffer Percentage:
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[30.50% - 32.00%] (to be determined on the Trade Date)
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Buffer Level:
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[68.00% - 69.50%] of the Initial Level (to be determined on the Trade Date)
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Principal at Risk:
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The Notes are NOT principal protected.
You may lose a substantial portion of your principal amount at maturity if the Final Level is less than the Buffer Level of [68.00% - 69.50%] (to be determined on the Trade Date).
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Calculation Agent:
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RBCCM
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U.S. Tax Treatment:
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By purchasing a Note, each holder agrees (in the absence of a change in law, an administrative determination or a judicial
ruling to the contrary) to treat the Notes as a pre-paid cash-settled derivative contract for U.S. federal income tax purposes. However, the U.S. federal income tax consequences of your investment in the Notes are uncertain and the Internal
Revenue Service could assert that the Notes should be taxed in a manner that is different from that described in the preceding sentence. Please see the section below, “Supplemental Discussion of U.S. Federal Income Tax Consequences,” and
the discussion (including the opinion of our counsel Morrison & Foerster LLP) in the product prospectus supplement dated September 11, 2018 under “Supplemental Discussion of U.S. Federal Income Tax Consequences,” which apply to the
Notes.
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Secondary Market:
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RBCCM (or one of its affiliates), though not obligated to do so, may maintain a secondary market in the Notes after the Issue
Date. The amount that you may receive upon sale of your Notes prior to maturity may be less than the principal amount of your Notes.
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Listing:
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The Notes will not be listed on any securities exchange.
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Clearance and
Settlement:
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DTC global (including through its indirect participants Euroclear and Clearstream, Luxembourg as described under “Description
of Debt Securities—Ownership and Book-Entry Issuance” in the prospectus dated September 7, 2018).
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Terms Incorporated in
the Master Note:
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All of the terms appearing above the item captioned “Secondary Market” on pages P-2 and P-3 of this terms supplement and the terms appearing
under the caption “General Terms of the Notes” in the product prospectus supplement dated September 11, 2018, as modified by this terms supplement.
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Buffered Enhanced Return Notes
Linked to the iShares® U.S. Real Estate
ETF
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ADDITIONAL TERMS OF YOUR NOTES
You should read this terms supplement together with the prospectus dated September 7, 2018, as supplemented by the prospectus supplement dated September
7, 2018 and the product prospectus supplement dated September 11, 2018, relating to our Senior Global Medium-Term Notes, Series H, of which these Notes are a part. Capitalized terms used but not defined in this terms supplement will have the
meanings given to them in the product prospectus supplement. In the event of any conflict, this terms supplement will control. The Notes vary from the terms
described in the product prospectus supplement in several important ways. You should read this terms supplement carefully.
This terms supplement, together with the documents listed below, contains the terms of the Notes and supersedes all prior or
contemporaneous oral statements as well as any other written materials including preliminary or indicative pricing terms, correspondence, trade ideas, structures for implementation, sample structures, brochures or other educational materials of
ours. You should carefully consider, among other things, the matters set forth in “Risk Factors” in the prospectus supplement dated September 7, 2018 and “Additional Risk Factors Specific to the Notes” in the product prospectus supplement dated
September 11, 2018, as the Notes involve risks not associated with conventional debt securities. We urge you to consult your investment, legal, tax, accounting and other advisors before you invest in the Notes. You may access these documents on the
Securities and Exchange Commission (the “SEC”) website at www.sec.gov as follows (or if that address has changed, by reviewing our filings for the relevant date on the SEC website):
Prospectus dated September 7, 2018:
Prospectus Supplement dated September 7, 2018:
Product Prospectus Supplement ERN-ETF-1 dated September 11, 2018:
Our Central Index Key, or CIK, on the SEC website is 1000275. As used in this terms supplement, “we,” “us,” or “our” refers to Royal Bank of Canada.
Royal Bank of Canada has filed a registration statement (including a product prospectus supplement, a prospectus supplement, and a
prospectus) with the SEC for the offering to which this terms supplement relates. Before you invest, you should read those documents and the other documents relating to this offering that we have filed with the SEC for more complete information
about us and this offering. You may obtain these documents without cost by visiting EDGAR on the SEC website at www.sec.gov. Alternatively, Royal Bank of Canada, any
agent or any dealer participating in this offering will arrange to send you the product prospectus supplement, the prospectus supplement and the prospectus if you so request by calling toll-free at 1-877-688-2301.
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Buffered Enhanced Return Notes
Linked to the iShares® U.S. Real Estate
ETF
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HYPOTHETICAL RETURNS
The examples set out below are included for illustration purposes only. The hypothetical
Percentage Changes of the Reference Asset used to illustrate the calculation of the Payment at Maturity (rounded to two decimal places) are not estimates or forecasts of the Initial Level, the Final Level or the share price of the Reference
Asset on any trading day prior to the Maturity Date. All examples assume a Buffer Percentage of 31.25% (the Buffer Level is 68.75% of the Initial Level) (the midpoint of the Buffer Percentage range of 30.50% - 32.00%), a Leverage Factor of 150%,
the Maximum Redemption Amount of 120% of the principal amount and that a holder purchased Notes with an aggregate principal amount of $1,000 and that no market disruption event occurs on
the Valuation Date.
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Example 1—
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Calculation of the Payment at Maturity where the Percentage Change is positive.
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Percentage Change:
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5%
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Payment at Maturity:
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$1,000 + ($1,000 x 5% x 150%) = $1,000 + $75.00 = $1,075.00
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On a $1,000 investment, a 5% Percentage Change results in a Payment at Maturity of $1,075.00, a 7.50% return on the Notes.
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Example 2—
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Calculation of the Payment at Maturity where the Percentage Change is positive (and the Payment at Maturity is subject to the Maximum
Redemption Amount).
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Percentage Change:
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25.00%
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Payment at Maturity:
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$1,000 + ($1,000 x 25.00% x 150%) = $1,000 + $375.00 = $1,375.00
However, the Maximum Redemption Amount is $1,200.00
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On a $1,000 investment, a 25.00% Percentage Change results in a Payment at Maturity of $1,200.00, a 20.00% return on the Notes.
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Example 3—
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Calculation of the Payment at Maturity where the Percentage Change is negative (but not by more than the Buffer Percentage).
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Percentage Change:
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-8%
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Payment at Maturity:
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At maturity, if the Percentage Change is negative BUT not by more than the Buffer Percentage, then the Payment at Maturity will equal the
principal amount.
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On a $1,000 investment, a -8% Percentage Change results in a Payment at Maturity of $1,000, a 0% return on the Notes.
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Example 4—
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Calculation of the Payment at Maturity where the Percentage Change is negative (by more than the Buffer Percentage).
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Percentage Change:
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-40%
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Payment at Maturity:
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$1,000 + [$1,000 x (-40% + 31.25%)] = $1,000 - $87.50 = $912.50
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On a $1,000 investment, a -40% Percentage Change results in a Payment at Maturity of $912.50, a –8.75% return on the Notes.
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Buffered Enhanced Return Notes
Linked to the iShares® U.S. Real Estate
ETF
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SELECTED RISK CONSIDERATIONS
An investment in the Notes involves significant risks. Investing in the Notes is not equivalent to investing directly in the Reference Asset. These
risks are explained in more detail in the section “Additional Risk Factors Specific to the Notes,” beginning on page PS-4 of the product prospectus supplement. In addition to the risks described in the prospectus supplement and the product
prospectus supplement, you should consider the following:
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Principal at Risk — Investors in the Notes could lose a substantial portion of their principal amount if
there is a decline in the share price of the Reference Asset. You will lose 1% of the principal amount of your Notes for each 1% that the Final Level is less than the Initial Level by more than [30.50% - 32.00%] (to be determined on the
Trade Date).
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The Notes Do Not Pay Interest and Your Return May Be Lower than the Return on a Conventional Debt Security of
Comparable Maturity — There will be no periodic interest payments on the Notes as there would be on a conventional fixed-rate or floating-rate debt security having the same maturity. The return that you will receive on the
Notes, which could be negative, may be less than the return you could earn on other investments. Even if your return is positive, your return may be less than the return you would earn if you bought a conventional senior interest
bearing debt security of Royal Bank.
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Your Potential Payment at Maturity Is Limited — The Notes will provide less opportunity to participate in
the appreciation of the Reference Asset than an investment in a security linked to the Reference Asset providing full participation in the appreciation, because the payment at maturity will not exceed the Maximum Redemption Amount.
Accordingly, your return on the Notes may be less than your return would be if you made an investment in the Reference Asset or a security directly linked to the positive performance of the Reference Asset.
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Payments on the Notes Are Subject to Our Credit Risk, and Changes in Our Credit Ratings Are Expected to Affect the
Market Value of the Notes — The Notes are Royal Bank’s senior unsecured debt securities. As a result, your receipt of the amount due on the maturity date is dependent upon Royal Bank’s ability to repay its obligations at that
time. This will be the case even if the share price of the Reference Asset increases after the Trade Date. No assurance can be given as to what our financial condition will be at the maturity of the Notes.
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There May Not Be an Active Trading Market for the Notes—Sales in the Secondary Market May Result in Significant
Losses — There may be little or no secondary market for the Notes. The Notes will not be listed on any securities exchange. RBCCM and other affiliates of Royal Bank may make a market for the Notes; however, they are not
required to do so. RBCCM or any other affiliate of Royal Bank may stop any market-making activities at any time. Even if a secondary market for the Notes develops, it may not provide significant liquidity or trade at prices advantageous
to you. We expect that transaction costs in any secondary market would be high. As a result, the difference between bid and asked prices for your Notes in any secondary market could be substantial.
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You Will Not Have Any Rights to the Securities Included in the Reference Asset — As a holder of the Notes,
you will not have voting rights or rights to receive cash dividends or other distributions or other rights that holders of securities included in the Reference Asset would have. The Final Level will not reflect any dividends paid on the
securities included in the Reference Asset, and accordingly, any positive return on the Notes may be less than the potential positive return on those securities.
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The Initial Estimated Value of the Notes Will Be Less than the Price to the Public — The initial estimated
value set forth on the cover page and that will be set forth in the final pricing supplement for the Notes does not represent a minimum price at which we, RBCCM or any of our affiliates would be willing to purchase the Notes in any
secondary market (if any exists) at any time. If you attempt to sell the Notes prior to maturity, their market value may be lower than the price you paid for them and the initial estimated value. This is due to, among other things,
changes in the share price of the Reference Asset, the borrowing rate we pay to issue securities of this kind, and the inclusion in the price to the public of estimated costs relating to our hedging of the Notes. These factors, together
with various credit, market and economic factors over the term of the Notes, are expected to reduce the price at which you may be able to sell the Notes in any secondary market and will affect the value of the Notes in complex and
unpredictable ways. Assuming no change in market conditions or any other relevant factors, the price, if any, at which you may be able to sell your Notes prior to maturity may be less than your original purchase price, as any such sale
price would not be expected to include the hedging costs relating to the Notes. In addition to bid-ask spreads, the value of the Notes determined for any secondary market price is expected to be based on the secondary rate rather than
the internal funding rate used to price the Notes and determine the initial estimated value. As a result, the secondary price will be less than if the internal funding rate was used. The Notes are not designed to be short-term trading
instruments. Accordingly, you should be able and willing to hold your Notes to maturity.
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The Initial Estimated Value of the Notes on the Cover Page and that We Will Provide in the Final Pricing Supplement
Are Estimates Only, Calculated as of the Time the Terms of the Notes Are Set — The initial estimated value of the Notes will be based on the value of our obligation to
make the payments on the Notes, together with the mid-market value of the
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Buffered Enhanced Return Notes
Linked to the iShares® U.S. Real Estate
ETF
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derivative embedded in the terms of the Notes. See “Structuring the Notes” below. Our estimates are based on a
variety of assumptions, including our credit spreads, expectations as to dividends, interest rates and volatility, and the expected term of the Notes. These assumptions are based on certain forecasts about future events, which may prove to be
incorrect. Other entities may value the Notes or similar securities at a price that is significantly different than we do.
The value of the Notes at any time after the Trade Date will vary based on many factors,
including changes in market conditions, and cannot be predicted with accuracy. As a result, the actual value you would receive if you sold the Notes in any secondary market, if any, should be expected to differ materially from the initial estimated
value of your Notes.
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Market Disruption Events and Adjustments — The payment at maturity and the Valuation Date are subject to
adjustment as described in the product prospectus supplement. For a description of what constitutes a market disruption event as well as the consequences of that market disruption event, see “General Terms of the Notes—Market Disruption
Events” in the product prospectus supplement.
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The Securities Composing the Underlying Index Are Concentrated in One Sector – All of the securities included in the Underlying Index are issued by companies in the U.S. real estate industry. As a result, the securities that will determine the performance of the
Reference Asset and the value of the Notes are concentrated in one sector. Although an investment in the Notes will not give holders any ownership or other direct interests in the securities composing the Underlying Index, the return on
an investment in the Notes will be subject to certain risks associated with a direct equity investment in companies in the market sector. Accordingly, by investing in the Notes, you will not benefit from the diversification which could
result from an investment linked to companies that operate in multiple sectors.
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An Investment in the Notes is Subject to the Risks Associated with the U.S. Real Estate Sector. All or
substantially all of the stocks held by the Reference Asset are issued by companies that invest in real estate, such as REITs or real estate holding companies, which are subject to the risks of owning real estate directly, as well as to
risks that relate specifically to the way in which these companies are organized and operated. Real estate is highly sensitive to general and local economic conditions and developments, and characterized by intense competition and
periodic overbuilding. In addition, these companies, including REITs, utilize leverage (and some may be highly leveraged), which increases investment risk and the risk normally associated with debt financing, and could potentially
magnify the Reference Asset’s losses. Although an investment in the Notes will not give holders any ownership or other direct interests in the stocks held by the Reference Asset, the return on the Notes will be subject to certain risks
associated with a direct equity investment in U.S. real estate.
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Adjustments to the Reference Asset Could Adversely Affect the Notes — The Advisor of the Reference Asset is responsible for calculating and maintaining the Reference Asset. The Advisor can add, delete or substitute the stocks comprising the Reference Asset.
The Advisor may make other methodological changes that could change the share price of the Reference Asset at any time. If one or more of these events occurs, the calculation of the amount payable at maturity may be adjusted to reflect
such event or events. Consequently, any of these actions could adversely affect the amount payable at maturity and/or the market value of the Notes.
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We Have No Affiliation with the Index Sponsor and Will Not Be Responsible for Any Actions Taken by the Index Sponsor
— The Index Sponsor is not an affiliate of ours and will not be involved in the offering of the Notes in any way. Consequently, we have no control over
the actions of the Index Sponsor, including any actions of the type that would require the calculation agent to adjust the payment to you at maturity. The Index Sponsor has no obligation of any sort with respect to the Notes. Thus, the
Index Sponsor has no obligation to take your interests into consideration for any reason, including in taking any actions that might affect the value of the Notes. None of our proceeds from the issuance of the Notes will be delivered to
the Index Sponsor.
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We and Our Affiliates Do Not Have Any Affiliation with the Advisor and Are Not Responsible for its Public Disclosure
of Information — We and our affiliates are not affiliated with Advisor in any way and have no ability to control or predict its actions, including any errors in or discontinuance of disclosure regarding its methods or policies
relating to the Reference Asset. The Advisor is not involved in the offering of the Notes in any way and has no obligation to consider your interests as an owner of the Notes in taking any actions relating to the Reference Asset that
might affect the value of the Notes. Neither we nor any of our affiliates has independently verified the adequacy or accuracy of the information about the Advisor or the Reference Asset contained in any public disclosure of information.
You, as an investor in the Notes, should make your own investigation into the Reference Asset.
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The Correlation Between the Performance of the Reference Asset and the Performance of the Underlying Index May Be
Imperfect — The performance of the Reference Asset is linked principally to the performance of the Underlying Index. However, because of the potential
discrepancies identified in more detail in the product prospectus supplement, the return on the Reference Asset may correlate imperfectly with the return on the Underlying Index.
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Buffered Enhanced Return Notes
Linked to the iShares® U.S. Real Estate
ETF
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The Reference Asset Is Subject to Management Risks — The Reference Asset is subject to management risk, which is the risk that the Advisor’s investment strategy, the
implementation of which is subject to a number of constraints, may not produce the intended results. For example, the Advisor may invest a portion of the Reference Asset’s assets in securities not included in the relevant industry or
sector but which BlackRock believes will help the Reference Asset track the relevant industry or sector.
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Our Business Activities May Create Conflicts of Interest —
We and our affiliates expect to engage in trading activities related to the Reference Asset or the securities held by the Reference Asset that are not for the account of holders of the Notes or on their behalf. These trading
activities may present a conflict between the holders’ interests in the Notes and the interests we and our affiliates will have in their proprietary accounts, in facilitating transactions, including options and other derivatives
transactions, for their customers and in accounts under their management. These trading activities, if they influence the prices of the Reference Asset, could be adverse to the interests of the holders of the Notes. We and one or more
of our affiliates may, at present or in the future, engage in business with the issuers of the securities held by the Reference Asset, including making loans to or providing advisory services. These services could include investment
banking and merger and acquisition advisory services. These activities may present a conflict between our or one or more of our affiliates’ obligations and your interests as a holder of the Notes. Moreover, we and our affiliates may
have published, and in the future expect to publish, research reports with respect to the Reference Asset. This research is modified from time to time without notice and may express opinions or provide recommendations that are
inconsistent with purchasing or holding the Notes. Any of these activities by us or one or more of our affiliates may affect the price of the Reference Asset, and, therefore, the market value of the Notes.
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Buffered Enhanced Return Notes
Linked to the iShares® U.S. Real Estate
ETF
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INFORMATION REGARDING THE REFERENCE ASSET
We have derived the following information from publicly available documents. We have not independently verified the accuracy or completeness of the
following information. We are not affiliated with the Reference Asset, and the Reference Asset will have no obligations with respect to the Notes.
The shares of the Reference Asset are issued by iShares, Inc., a registered investment company. The Reference Asset seeks investment results that
correspond generally to the price and yield performance, before fees and expenses, of the Dow Jones U.S. Real Estate Index. The Reference Asset trades on the NYSE Arca under the ticker symbol “IYR.” BlackRock Fund Advisors (“BFA”) serves as the
investment advisor to the Reference Asset. The Reference Asset utilizes a “passive” or “indexing” investment approach in attempting to track the performance of the Underlying Index. The Reference Asset generally invests at least 90% of its assets
in securities of the Underlying Index and in depositary receipts representing securities of the Underlying Index.
For additional information regarding iShares Inc., BFA, the Reference Asset and the risk factors attributable to the Reference Asset, please see the
Prospectus, as amended to date, filed as part of the Registration Statement on Form N-1A with the SEC under the Securities Act of 1933, as amended, and under the Investment Company Act of 1940, as amended. Information provided to or filed with the
SEC can be inspected and copied at the public reference facilities maintained by the SEC or through the SEC’s website at www.sec.gov. In addition, information regarding the Reference Asset, including its top portfolio holdings, may be obtained from
other sources including, but not limited to, press releases, newspaper articles, other publicly available documents, and the iShares® website at www.ishares.com. We are not incorporating by reference the website or any material it
includes in this document. Neither we nor the dealer makes any representation or warranty as to the accuracy or completeness of any such material.
Investment Objective and Strategy
The Reference Asset seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the
Underlying Index. The Reference Asset’s investment objective and the Underlying Index may be changed at any time without shareholder approval. Notwithstanding the Reference Asset’s investment objective, the return on the Notes will not reflect any
dividends paid on the Reference Asset shares, on the securities purchased by the Reference Asset or on the securities that comprise the Underlying Index.
The return on the Notes is linked to the performance of the iShares® U.S. Real Estate ETF, and not to the performance of the Dow Jones U.S.
Real Estate IndexSM on which the Reference Asset is based. Although the Reference Asset seeks results that correspond generally to the performance of the Underlying Index, the Reference Asset follows a strategy of “representative
sampling,” which means the Reference Asset’s holdings do not identically correspond to the holdings and weightings of the Underlying Index, and may significantly diverge from the Underlying Index. Although the Reference Asset generally invests at
least 90% of its assets in some of the same securities as those contained in the Underlying Index and in depositary receipts representing the same securities as those contained in the Underlying Index, it does not hold all of the securities
underlying the Underlying Index and may invest the remainder in securities that are not contained in the Underlying Index, or in other types of investments. Currently, the Reference Asset holds substantially fewer securities than the Underlying
Index. Additionally, when the Reference Asset purchases securities not held by the Underlying Index, the Reference Asset may be exposed to additional risks, such as counterparty credit risk or liquidity risk, to which the Underlying Index
components are not exposed. Therefore, the Reference Asset will not directly track the performance of the Underlying Index and there may be significant variation between the performance of the Reference Asset and the Underlying Index on which it is
based.
Representative Sampling
BFA uses a representative sampling strategy to track the Underlying Index. Representative sampling is an indexing strategy that involves investing in a
representative sample of securities that collectively has an investment profile similar to the Underlying Index. The securities selected are expected to have, in the aggregate, investment characteristics (based on factors such as market
capitalization and industry weightings), fundamental characteristics (such as return variability and yield) and liquidity measures similar to those of the Underlying Index. Funds may or may not hold all of the securities that are included in the
Underlying Index.
The Underlying Index
The information below is included only to give insight to the Underlying Index, the performance of which the Reference Asset attempts to reflect. The
Notes are linked to the performance of the Reference Asset and not to the Underlying Index.
The Dow Jones U.S. Real Estate Index is a float-adjusted market capitalization-weighted real-time index that provides a broad measure of the performance of the real estate
sector of the U.S. securities market. Component companies consist of REITs, and other companies that invest directly or indirectly in real estate through development, management, or ownership, including property agencies. Because the Underlying
Index is comprised primarily of REITs, the prices of the component stocks reflect changes in lease rates, vacancies, property development and other transactions. The Underlying Index was first calculated on February 14, 2000. The level of the
Underlying Index was set to 100 on the base date of December 31, 1991.
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The Underlying Index is a subset of the Dow Jones U.S. IndexSM, a broad-based measure of the U.S. stock market, which aims to measure the
performance of 95% of U.S. stocks by float-adjusted market capitalization. The Underlying Index universe is defined as all stocks traded on the major U.S. stock exchanges, minus any non-common issues and illiquid stocks. The Dow Jones U.S. IndexSM
is part of the Dow Jones Global Indices®, which is a benchmark family of indices that currently follows stocks from a variety of countries.
Underlying Index Calculation
The Underlying Index level is calculated using a fraction, the numerator of which is the price of each stock in the Underlying Index multiplied by the
number of shares used in the Underlying Index calculation (total shares outstanding times the IWF), and summed across all the stocks in the Underlying Index. The IWF is the investable weight factor, which is the available float shares (total shares
outstanding less shares held by control holders) divided by the total shares outstanding. The denominator is the index divisor.
To assure that the Underlying Index’s value, or level, does not change when stocks are added or deleted, the divisor is adjusted to offset the change
in market value of the Underlying Index. Thus, the divisor plays a critical role in the Underlying Index’s ability to provide a continuous measure of market valuation when faced with changes to the stocks included in the Underlying Index. In a
similar manner, some corporate actions that cause changes in the market value of the stocks in an index should not be reflected in the Underlying Index level. Adjustments are made to the divisor to eliminate the impact of these corporate actions.
Any change to the stocks in the Underlying Index that alters the total market value of the Underlying Index while holding stock prices constant will require a divisor adjustment. Corporate actions which require an adjustment to the divisor
include: a company being added or deleted from the Underlying Index; a change in shares outstanding; stock splits; spin-offs where the spun off company is not added to the Underlying Index or where the spun off company is added but another company
is removed; changes in IWF; special dividends; and rights offerings.
Underlying Index Composition and Maintenance
Defining the Investable Universe: The Underlying Index component candidates must trade on a major U.S. stock exchange and must be common shares or
other securities that have the characteristics of common equities. All classes of common shares, both fully and partially paid, are eligible. Fixed-dividend shares and securities such as convertible notes, warrants, rights, mutual funds, unit
investment trusts, closed-end fund shares, and shares in limited partnerships are not eligible. Temporary issues arising from corporate actions, such as “when-issued shares,” are considered on a case-by-case basis when necessary to maintain
continuity in a company’s index membership. REITs, listed property trusts (LPTs), and similar real-property-owning pass-through structures taxed as REITs by their domiciles are also eligible. If a company has more than one class of shares, only one
class of shares will be included. Securities that have had more than ten non-trading days during the past quarter are excluded.
Stock Selection: The Underlying Index universe is sorted by float-adjusted market capitalization and the stocks in the top 95% are selected as
components of the Underlying Index, excluding stocks that fall within the bottom 1% of the universe according to their free-float market capitalization and within the bottom .01% of the universe according to their turnover. To be included in the
Underlying Index, the issuer of each component security must be classified in the Real Estate Supersector, as defined by the proprietary classification system used by S&P Dow Jones Indices LLC.
Review Process: The Underlying Index is reconstituted annually in September. All index components are reviewed to determine their eligibility, and the
float factor for each component is reviewed and updated as needed. Changes are implemented at the opening of trading on the Monday following the third Friday of September.
The Underlying Index is also reviewed on a quarterly basis. Shares outstanding totals for component stocks are updated during each quarterly review.
Changes in shares outstanding of less than 5% are accumulated and made quarterly in March, June, September and December. These changes, as well as any weight adjustments, are implemented at the opening of trading on the Monday following the third
Friday of the quarterly update month. If the number of outstanding shares for an index component changes by more than 5% due to a corporate action, the shares total will be adjusted. The timing of the adjustment will depend on the type of event
that causes the change. If the impact of corporate actions during the period between quarterly share updates changes the number of a company’s shares outstanding by 5% or more, and that change causes a company’s float factor to change by 5% or
more, then the company’s float factor will be updated at the same time as the share change. If a component no longer meets the eligibility requirements, it will be removed from the Underlying Index. Whenever possible, any such change will be
announced at least two business days prior to its implementation.
In addition to the scheduled quarterly reviews, the Underlying Index is reviewed on an ongoing basis. Changes in the Underlying Index’s composition and related weight
adjustments are necessary whenever there are extraordinary events such as delistings, bankruptcies, mergers, or takeovers involving index components. In these cases, each event will be taken into account as soon as it is effective. Whenever
possible, the changes in the Underlying Index components will be announced at least two business days prior to their implementation date.
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Historical Information
The graph below sets forth the information relating to the historical performance of the Reference Asset. The information provided in this table is for
the period from January 1, 2014 through February 7, 2019.
We obtained the information regarding the historical performance of the Reference Asset in the graph below from Bloomberg Financial Markets.
We have not independently verified the accuracy or completeness of the information obtained from Bloomberg Financial Markets. The historical
performance of the Reference Asset should not be taken as an indication of its future performance, and no assurance can be given as to the Final Level of the Reference Asset. We cannot give you assurance that the performance of the Reference Asset
will result in any positive return on your initial investment.
iShares® U.S. Real Estate ETF (“IYR”)
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.
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SUPPLEMENTAL DISCUSSION OF
U.S. FEDERAL INCOME TAX CONSEQUENCES
The following disclosure supplements, and to the extent inconsistent supersedes,
the discussion in the product prospectus supplement dated September 11, 2018 under “Supplemental Discussion of U.S. Federal Income Tax Consequences.”
Under Section 871(m) of the Code, a “dividend equivalent” payment is treated as a dividend from sources within the United States. Such payments
generally would be subject to a 30% U.S. withholding tax if paid to a non-U.S. holder. Under U.S. Treasury Department regulations, payments (including deemed payments) with respect to equity-linked instruments (“ELIs”) that are “specified ELIs” may
be treated as dividend equivalents if such specified ELIs reference an interest in an “underlying security,” which is generally any interest in an entity taxable as a corporation for U.S. federal income tax purposes if a payment with respect to
such interest could give rise to a U.S. source dividend. However, the IRS has issued guidance that states that the U.S. Treasury Department and the IRS intend to amend the effective dates of the U.S. Treasury Department regulations to provide that
withholding on dividend equivalent payments will not apply to specified ELIs that are not delta-one instruments and that are issued before January 1, 2021. Based on our determination that the Notes are not delta-one instruments, non-U.S. holders
should not be subject to withholding on dividend equivalent payments, if any, under the Notes. However, it is possible that the Notes could be treated as deemed reissued for U.S. federal income tax purposes upon the occurrence of certain events
affecting the Reference Asset or the Notes (for
example, upon a rebalancing of the Reference Asset), and following such occurrence the Notes could be treated as subject to withholding on dividend equivalent payments. Non-U.S. holders that
enter, or have entered, into other transactions in respect of the Reference Asset or the Notes should consult their tax advisors as to the application of the dividend equivalent withholding tax in the context of the Notes and their other
transactions. If any payments are treated as dividend equivalents subject to withholding, we (or the applicable withholding agent) would be entitled to withhold taxes without being required to pay any additional amounts with respect to amounts so
withheld.
The accompanying product prospectus supplement notes that FATCA withholding on payments of gross proceeds from a sale or
redemption of Notes will only apply to payments made after December 31, 2018. That discussion is modified to reflect regulations proposed by the U.S. Treasury Department in December 2018 indicating an intent to eliminate the requirement under FATCA
of withholding on gross proceeds of the disposition of financial instruments. The U.S. Treasury Department has indicated that taxpayers may rely on these proposed regulations pending their finalization. Prospective investors are urged to consult
with their own tax advisors regarding the possible implications of FATCA on their investment in the Notes.
SUPPLEMENTAL PLAN OF DISTRIBUTION (CONFLICTS OF INTEREST)
We expect that delivery of the Notes will be made against payment for the Notes on or about February 28, 2019, which is the third
(3rd) business day following the Trade Date (this settlement cycle being referred to as “T+3”). See “Plan of Distribution” in the prospectus dated September 11, 2018. For additional information as to the relationship between us and RBCCM, please
see the section “Plan of Distribution—Conflicts of Interest” in the prospectus dated September 7, 2018.
We expect to deliver the Notes on a date that is greater than two business days
following the Trade Date. Under Rule 15c6-1 of the Exchange Act, trades in the secondary market generally are required to settle in two business days, unless the parties to any such trade expressly agree otherwise. Accordingly, purchasers who
wish to trade the Notes more than two business days prior to the original Issue Date will be required to specify alternative settlement arrangements to prevent a failed settlement.
The value of the Notes shown on your account statement may be based on RBCCM’s
estimate of the value of the Notes if RBCCM or another of our affiliates were to make a market in the Notes (which it is not obligated to do). That estimate will be based upon the price that RBCCM may pay for the Notes in light of then prevailing
market conditions, our creditworthiness and transaction costs. For a period of approximately three months after the issue date of the Notes, the value of the Notes that may be shown on your account statement may be higher than RBCCM’s estimated
value of the Notes at that time. This is because the estimated value of the Notes will not include our hedging costs and profits; however, the value of the Notes shown on your account statement during that period may initially be a higher amount,
reflecting the addition of our estimated costs and profits from hedging the Notes. This excess is expected to decrease over time until the end of this period. After this period, if RBCCM repurchases your Notes, it expects to do so at prices that
reflect their estimated value.
We may use this terms supplement in the initial sale of the Notes. In addition, RBCCM or another of our affiliates may use this terms supplement in a market-making
transaction in the Notes after their initial sale. Unless we or our agent informs the purchaser otherwise in the confirmation of sale, this terms supplement
is being used in a market-making transaction.
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STRUCTURING THE NOTES
The Notes are our debt securities, the return on which is linked to the performance of the Reference Asset. As is the case for all of our debt securities,
including our structured notes, the economic terms of the Notes reflect our actual or perceived creditworthiness at the time of pricing. In addition, because structured notes result in increased operational, funding and liability management costs
to us, we typically borrow the funds under these Notes at a rate that is more favorable to us than the rate that we might pay for a conventional fixed or floating rate debt security of comparable maturity. Using this relatively lower implied
borrowing rate rather than the secondary market rate, is a factor that is likely to reduce the initial estimated value of the Notes at the time their terms are set. Unlike the estimated value included in this terms supplement or in the final
pricing supplement, any value of the Notes determined for purposes of a secondary market transaction may be based on a different funding rate, which may result in a lower value for the Notes than if our initial internal funding rate were used.
In order to satisfy our payment obligations under the Notes, we may choose to enter
into certain hedging arrangements (which may include call options, put options or other derivatives) on the issue date with RBCCM or one of our other subsidiaries. The terms of these hedging arrangements take into account a number of factors,
including our creditworthiness, interest rate movements, the volatility of the Reference Asset, and the tenor of the Notes. The economic terms of the Notes and their initial estimated value depend in part on the terms of these hedging
arrangements.
The lower implied borrowing rate is a factor that reduces the economic terms of the
Notes to you. The initial offering price of the Notes also reflects our estimated hedging costs. These factors result in the initial estimated value for the Notes on the Trade Date being less than their public offering price. See “Selected Risk
Considerations—The Initial Estimated Value of the Notes Will Be Less than the Price to the Public” above.