Brookfield Property Partners: It's Literally The Best Time Ever To Buy This 7.1% Yielding Blue-Chip

Summary

• Buying quality high-yield blue-chips at massive discounts to fair value is the most time tested way to build both wealth and income over time.
• Right now, Brookfield Property Partners (and its REIT counterpart) are the most undervalued quality real estate stocks you can buy.
• This 7.1% yielding blue-chip owns world-class assets, is run by the best global real estate managers on earth (26% long-term returns on investments) and is trading at a 38% discount to NAV.
• Management has a proven track record of solid cash flow and payout growth, and a great long-term plan to continue delivering industry-leading growth rates and up to 25% CAGR total returns over the next five years.
• While there are plenty of risks to owning BPY and BPR, for patient high-yield value investors these are my two highest conviction buys right now, which is why I recently more than doubled my position in BPY.

(Source: imgflip)

History has proven that value dividend investing is the most powerful way for regular people to build incredible passive income and wealth over time. This is why my high-yield income growth retirement portfolio is dedicated to three principles:

• maximum safe yield
• fast long-term dividend growth
• buying stocks at deep discounts to fair value

Such an approach isn't easy, requiring incredible patience and a willingness to "catch falling knives with conviction". But if you have the iron stomach to handle volatility and long periods of underperformance, the results can be incredible. For example, many of the REITs I bought a year ago, during the most recent REIT bear market, are now showing 20% to 45% total returns over just 12 months.

While REITs, in general, remain attractively priced, there are now far fewer table pounding deep value opportunities left for high-yield blue-chip investors to choose from. However, Brookfield Property Partners (NASDAQ:BPY), as well as its REIT counterpart Brookfield Property REIT (BPR), are two of my highest conviction buys right now.

(Source: Ycharts)

That's because Wall Street has turned so bearish on BPY that it recently hit an all-time low, meaning the highest yield in its history (7.2%) and most attractive valuation (40% discount to NAV). Or to put another way, there has literally never been a better time to buy this stock. This is why I recently bought $15,000 worth of BPY, more than doubling my position (after tripling it a few months ago). What's more, I have limits in place to continue adding in case the market wishes to offer me the Berkshire (BRK.B) of global real estate stocks at even great discounts.

So let's take a look at the reason that the market hates Brookfield Property so much right now, as to totally discount its strong and improving fundamentals. More importantly, find out why BPY and BPR (for those that wish to avoid K-1s) are two of the best long-term high-yield income growth opportunities you can buy right now. Ones that should be able to deliver between 16% and 25% CAGR total returns over the next five years.

Why The Market Hates Brookfield Property Partners

There are three main reasons Wall hates BPY with such a passion right now. The first is the complex corporate structure. Brookfield Property Partners is one of the LPs created by Brookfield Asset Management (BAM) to grow its global hard asset (real estate, infrastructure, and utilities) empire. Over the past 115 years, Brookfield has managed to deliver 12% to 15% long-term returns to investors, which is why it's grown to be the world's largest hard asset manager, with over $300 billion AUM.

(Source: BPY Corporate Profile)

BPY is technically structured as an LP whose assets are themselves LPs. As a result, it uses a K-1 tax form, which comes with increased tax preparation complexity that some investors wish to avoid at all costs.

(Source: BPY Corporate Profile)

For such investors, you have a REIT alternative, Brookfield Property REIT, which was recently created after the LP closed on its $15 billion acquisition of General Growth Properties.

(Source: BPY Corporate Profile)

The only structural difference between BPR and BPY is that BPR only owns the GGP assets, however, management and the payout are the same. BPR investors get a 1099 tax form and their dividends are taxed the same as any REIT.

(Source: BPY Corporate Profile)

Because BPY is an LP, who operates similar to an MLP (though without generating UBTI so it's safe to own in retirement accounts), the market is likely put off by its complex financials, which include an extremely complex fee structure it pays Brookfield Asset Management, its sponsor and general partner. As my fellow Seeking Alpha contributor Ján Mazák recently calculated, those fees amount to about 0.2% of AUM and 1.1% of market cap. Given the benefits BPY gets from its affiliation with BAM, whose real estate investment track record includes 26% annualized returns on investment (more on this in a moment), I consider that a bargain.

Brookfield is famous for mega deals, including six major ones over the past five years.

(Source: Investor presentation)

Those were meant to bring most of BAM's global real estate AUM under the BPY umbrella. When it IPOd in 2013 80% of Brookfield real estate assets was held by other publicly traded stocks/partnerships. Today BPY represents about 50% of BAM's $170 billion in grade A real estate assets under management. The most recent mega-deal is the $11.4 billion acquisition of Forest City Realty Trust (NYSE:FCE.A), which BPY will own a 25% stake in. That deal is expected to close by December 10th.

But why does Wall Street dislike so many acquisitions? Because each one adds to the LP's already complex finances, and often includes the use of high-cost equity (due to BPY's persistently low valuation). This means, that from Wall Street's perspective there are two major downsides to BPY's M&A happy investing style.

After a large acquisition closes (as just happened with the GGP merger) the increased unit count can result in a temporarily decreased company funds from operation or CFFO/unit. CFFO is what funds the payout and in Q3 the payout ratio rose to 102% which some investors find alarming.

Metric	Q3 2018	YTD 2018
Company Funds From Operations Growth	5.5%	4.4%
Gains From LPs Growth	15.5%	32.7%
CFFO Per Unit Growth	-8.8%	0%
CFFO + Gains Per Unit Growth	-7.1%	1.8%
Distribution Growth	6.8%	6.8%
CFFO Payout Ratio	102%	91%

Click to enlarge

(Source: earnings release)

CEO Brian Kingston confirms that management was expecting the GGP deal closing to result in significant stock weakness (which is merely a better long-term buying opportunity).

I think as you would expect following a transaction of this size and the introduction of a lot of new shareholders, we anticipated there would be some period of volatility or weakness right after the GGP transaction." - Brian Kingston, (emphasis added)

But keep in mind three things. First, a major part of BPY's business model involves selling assets at large profits, which is not factored into CFFO. Second, the LP's actual payout ratio, over longer time frames is excellent, resulting in a distribution that's well covered by operating cash flow.

(Source: earnings supplement)

What's more, despite the large use of equity to fund its acquisitions (historically 42%) Brookfield Property's CFFO/unit and distribution has an impressive track record of growth over time.

(Source: investor presentation)

The other major reason Wall Street hates BPY's aggressive M&A strategy is due to misunderstanding management's funding strategy. Due to its high cost of equity BPY uses very aggressive leverage to make its deals accretive to long-term CFFO.

Stock	Pro-Forma Total Debt/EBITDA	Interest Coverage Ratio	Debt/Capital	S&P Credit Rating	Avg Interest Cost
Brookfield Property Partners	13.6	1.6	58%	BBB	4.4%
Sector Average	5.8	3.4	52%	NA	NA

Click to enlarge

(Sources: earnings supplement, earnings presentation, Gurufocus, FastGraphs)

Today the LP has a total of $46 billion in debt, which at first glance is alarmingly high. Most REITs have a leverage ratio of 5.8 but BPY's is 13.6. That means the debt/capital ratio is also above the average for REITs.

(Source: earnings supplement)

But there are two things about BPY's balance sheet that Wall Street is missing. The first is that 83% of the debt is of the non-recourse self-amortizing asset level variety (think mortgages). In terms of what investors are actually responsible (corporate level debt), the LP's leverage ratio is actually a very low 0.6. This is why BPY continues to enjoy an investment grade BBB from S&P which the rating agency reaffirmed in 2018 (after the GGP deal was announced). As a result, the LP gets to borrow at average interest rates of just 4.4%, about half its returns on investment of 7.9% on new redevelopment projects (thus explaining steady CFFO/unit growth).

Brookfield is famous for using non-recourse debt with all its LPs. Under its double pass-through structure the cash flow generated by each asset services the interest costs. In the event that an asset can't service the debt, lenders get to take control of the property, but can't go after the LP's other cash flow. Or to put another way, due to how the debt is structured, BPY investors are protected by a wide moat that guards their generous and steadily rising distribution. Basically, neither credit rating agencies nor bond investors are worried about Brookfield Property's high debt, and I too sleep well at night with this stock as my third largest position.

That's because management has a long-term target of a 50% debt to capital ratio (in line with REIT average) and has a solid deleveraging plan.

(Source: investor presentation)

In Q3 alone BPY sold $494 million in assets to pay down its debt and continues to sell non-core properties periodically. And lest we forget Brookfield is famous for extremely profitable asset sales, due to its skill at opportunistically buying undervalued assets, improving them and then selling them at much higher prices.

(Source: investor presentation)

Through 2022 alone BPY expects its LP stakes to deliver $5.8 billion in cash flow and profits which will be used to pay down debt, as well as eventually buyback its super cheap units. Over the next 15 years, its existing LP assets are expected to deliver $11 billion in cash and capital gains.

Now Wall Street is right to dislike one aspect of BPY's balance sheet, which is the LP's heavy use of floating rate debt.

(Source: earnings supplement)

37% or $17 billion of Brookfield Property's debt is floating rate, tied to LIBOR. $4.9 billion of that floating rate debt was taken on during the GGP merger, priced at LIBOR + 2.36%. When LIBOR rises, as it has over the last 12 months, then that can result in a significant hit to CFFO (7% in the Q3 on a YOY basis). Investors will want to watch that management achieves its deleveraging targets over time, to minimize the cash flow variability in a rising short-term interest rate environment. Another risk to consider is the global nature of BPY's assets means it has some currency risk. The strong US dollar resulted in a 2% decrease in CFFO in the last quarter.

The bottom line is that Wall Street hates BPY mainly due to its complex structure, a penchant for needle-moving acquisitions, and high-debt levels (which are actually much safer than they appear). While I can't predict at what point the market will finally price this stock based on its strong and improving fundamentals (growing cash flow and distributions) there are four reasons why I am confident that BPY will eventually prove to be one of the best high-yield blue-chip income growth investments you can make.

1. Why Now Is Literally The Best Time Ever To Buy The Berkshire Of Global Real Estate

One of the most attractive things about Brookfield Property Partners is the global nature of its Grade A properties. Brookfield Property is one of the best ways to gain exposure to some of the best real estate assets in the world.

(Source: Investor presentation)

Brookfield has offices in over 30 countries on five continents and so is able to opportunistically source quality properties trading at discounted prices.

(Source: BPY corporate profile)

80% of BPY's assets consist of its core retail and office properties. These are assets it buys with an eye to achieving at least 10% to 12% annualized returns while generating stable and growing rent over time (the main driver of CFFO).

Those core assets include:

• 150 office building totaling 46 million square feet of office space: 93% occupancy, 8.3-year average remaining lease, 8.3% rent below market value (built in rental increases over time)
• 125 malls totaling 122 million square feet of Class A retail space: 96% occupancy, 11.6% lease spreads (strong pricing power), sales per square foot $744

In fact, thanks to the GGP acquisition today BPY owns 8% of America's Class A ($500+ sales per square foot) malls.

(Source: Investor presentation)

BPY's assets are not just high-quality but include landmark properties such as London's famous Canary Wharf, and the Fashion Show convention center in Las Vegas.

In addition, 17% of its capital is invested in limited partnerships which own over 1,400 additional properties across seven REIT industries. These are all assets management acquires with a goal of eventually selling and delivering 20+% CAGR investment returns.

(Source: Investor presentation)

The Forest City acquisition, which BPY will own 25% of, includes numerous high-quality assets including:

• 6.3m square feet of office space
• 2.3m square feet of life science (medical) assets (primarily in Cambridge, MA)
• 2.2m square feet of premium retail space
• 18,500 multifamily units (apartments)

Which brings me to the biggest reason of all to own Brookfield Property Partners (and BPR as a pure REIT alternative). That would be that Brookfield's management is literally the best in the world at delivering Buffett like long-term returns in commercial real estate. I'm not exaggerating. Buffett's track record at Berkshire was delivering 26% annualized total returns and over the past decade, that's what Brookfield's real estate funds (the LPs) have delivered as well.

(Source: Investor presentation)

And lest you think that those returns are purely from legacy assets that Brookfield was somehow able to buy at historically low prices but won't be repeated rest assured that's not the case. The company continues to find immensely profitable investment opportunities including delivering 30% to 42% returns on recent investments.

(Source: BPY corporate profile)

BPY investors have benefited to a growing extent from these impressive gains increasing steadily over the years.

(Source: Investor presentation)

That trend is expected to continue, with management expecting $500 million to $600 million in realized profits on its investments over the coming five years. That's in addition to CFFO (organic rent derived cash flow) growth of 7% to 9%, which is among the fastest growth rates in REITdom.

(Source: Investor Presentation)

That, in turn, is expected to drive 5% to 8% distribution growth (and dividend growth at BPR) with BPY expecting to achieve closer to 8% payout growth per management's latest guidance. And from a distribution safety perspective management plans to deliver on that front as well, lowering the CFFO payout ratio over time to 78% by 2022. Again CFFO does not include profits from the LP asset sales.

(Source: investor presentation)

Most importantly of all, BPY's ambitious growth plans (more on this in a moment) are built around a self-funding business model. Here's what CEO Brian Kingston told analysts at the latest conference call:

Our business is self-funding. And as you know, we – a lot of the new capital we’re deploying into these investment opportunities is being surfaced through recycling of – the sale of more mature properties. So having a – having the shares at a level where we can issue equity is not necessary for us to execute the business plan that we’ve laid out." Brian Kingston, CEO (emphasis added)

Factor in the fact that BPY is currently trading for a 38% discount to its net asset value (intrinsic value) of $28.42 and you have the potential for some of the best total returns in all of real estate.

(Source: investor presentation)

Brookfield has a policy of trying to deliver 12% to 15% total returns on all its LPs, and with the exception of BPY, has lived up to that guidance on all of them (BEP and BIP). Going forward management expects at least 15% total returns purely from the combination of yield + long-term payout growth (Gordon Dividend Growth model, proven effective since 1956 and Brookfield's official total return model). But if BPY can close the valuation gap (meaning the discount to NAV)? Well, then investors are potentially looking at 25% CAGR total returns over the next five years.

Of course, BPY bears will point out that management has been hoping to close the valuation gap for the past five years, and most of the time has failed to do so.

(Source: Ycharts)

Since its IPO BPY's median price to NAV has been 0.81, largely due to the sharp declines in its unit price following large mergers that it's so fond of. But management has three main catalysts to close the valuation gap once and for all.

The first is achieving its deleveraging targets, which should go a long way to soothing skittish investor nerves. The second is buybacks, which BPY has not historically pursued.

The third thing we often discuss on these calls is the potential for buybacks. Given that we just closed the GGP transaction and we have a – there’s been a significant amount of transactional volume and capital required for that, you’ve got to give us a little while. But I’d say that we remain focused on that as a potential buyback. And I would note that Brookfield Asset Management has been active in buying shares since the closing of the GGP transaction, which we look at the two as all part of the same potential as far as addressing the (unit price) weakness." - Brian Kingston (emphasis added)

For now, just BAM is buying BPY units because the LP is focused on hitting its long-term deleveraging targets. But once that is accomplished via a combination of asset sales (at attractive profits) and cash flow growth (from redevelopment pipeline and organic NOI growth) then BPY will be able to begin repurchasing its own ultra-cheap units. That would become instantly highly accretive to NAV/unit as well as represent cash yields on invested capital of nearly 10% (in line with development projects it's working on).

But while achieving a stronger balance sheet and copious buybacks are two good catalysts for boosting its stock price, by far the biggest long-term catalyst for BPY is the LP's massive long-term growth runway.

2. Huge Growth Opportunities Ahead To Increase Cash Flow, Distributions, And Close The Valuation Gap

Brookfield Property's growth plans consist of two parts. The first is organic development projects from its core businesses.

Here's what Sandeep Mathrani, BPY's Global Head of Retail Real Estate, told analysts regarding the recent GGP merger, which was designed to provide the LP with massive Class A retail redevelopment opportunities.

So we anticipate the pace of deployment to be about 2x. So as you know, it’s about $800 million to $1 billion a year. And next year, we’re going to trend at about $800-ish million. So we’ve already increased it from our $500 million number. And I think by 2020, we should definitely be at about $1 billion a year." -Sandeep Mathrani (emphasis added)

Thanks to buying out GGP Brookfield Property will now be able to double its annual redevelopment spending (while self-funding and requiring no equity issuances) to $1 billion per year.

(Source: Investor Presentation)

Those are mostly focused on mix-use projects that increase the population density around its retail properties and thus boost occupancy, sales per square foot, and lease spreads (how much it can raise the rent when existing leases expire).

(Source: Investor Presentation)

Historically BPY's retail redevelopment projects have generated cash yields on cost of 6.9% to 9.6%, with an average of 8.8%. Today the LP is working on $1.6 billion of new projects with an average cash yield of 7.9%. But now that GGP is fully owned by Brookfield, that growth backlog is going to explode to roughly $5 billion over the next five years. That will drive significant CFFO/unit accretion given Brookfield's ample access to low-cost capital, as well as its planned future buybacks.

(Source: BPY corporate profile)

But retail is hardly the only growth area BPY is targeting. It also plans to continue expanding its office property base, as well as invest more heavily into apartments and condos.

In fact, the main reason for buying Forest City was for its 18,500 apartments, assets on which Brookfield plans to expand significantly in the coming years.

(Source: Investor Presentation)

Why focus on apartments? Because Brookfield is all about profiting from secular long-term trends, including the world's rapidly urbanizing population.

(Source: Investor Presentation)

In the US our population continues to grow about 1% per year, and thanks to a massive undersupply of new home construction (as well as rising mortgage rates) the affordability of renting vs owning a home continues to swing towards renters.

(Source: Hoya Capital Real Estate)

That's why recently the US homeownership rate fell to the lowest level in 53 years, and among Millennials is about 36%.

(Source: Investor Presentation)

The end result is that over the past 12 years higher home prices (up to 100% increase in some markets) have created 10 million new renters.

(Source: Investor Presentation)

That's driven very strong and sustained growth in apartment occupancies (to near a 14 year high), which Brookfield plans to cash in on. Not only is rental demand booming but the average apartment building in the US is 40 years old, thus creating an immense investment opportunity for renovations and new project development.

Brookfield isn't new the apartment game. The LP already owns full or partial stakes in 120 apartment complexes (4% of its asset base) comprising 35,000 units in 19 states. Forest City will boost that unit count by 50%.

(Source: Investor Presentation)

Brookfield has been investing in apartments for nearly a decade and has a proven ability to grow that asset base both organically (new development) as well as accretive acquisitions.

(Source: Investor Presentation)

Currently, Brookfield is working on over $5.5 billion in new apartment investments comprising 14,000 new apartment units.

(Source: Investor Presentation)

Those are all in thriving major metro areas where apartment demand is sky-high and high occupancy rates and good returns on investment are all but assured. When the Forest City deal closes on December 10th, and this backlog is complete, Brookfield will own about 68,0000 apartments and have doubled its unit count.

But don't think that Brookfield is just looking to build apartments for affluent city dwellers. Brookfield is all about maximizing cash flow and profits serving the needs of all people.

(Source: Investor Presentation)

That's why it plans to take advantage of the new opportunity zones created by 2017's tax reform. Why are opportunity zones a big opportunity for Brookfield? Because according to Brad Thomas, Seeking Alpha's REIT guru, "the Opportunity Zone is like a 1031 exchange—on steroids." According to Forbes the 1031 rule "allows individuals and corporations to sell a property, reinvest the proceeds in a new property and defer all capital gain taxes." Opportunity zones apply that rule to distressed communities but provide even better long-term tax incentives.

Companies and individuals can invest capital gains that they've realized on other investments into projects in poor communities (over 8,700 in the US) and then permanently lower their tax bill by 10% (for investments of five years), or 15% (for seven-year investments). Best of all, any appreciation from the investment that's held for 10+ years is 100% tax-free, both on the principle and capital gains. Tapping into opportunity zones, which are already starting to attract billions in institutional interest (from wealthy investors looking to minimize their tax burdens) is a classic financial chess move that Brookfield has become famous for over the past 115 years.

But don't think that Brookfield is only looking to grow its Grade A real estate empire in the US. According to MSCI Real Estate, the global real estate market grew 15% in 2017 to $8.5 trillion. Brookfield's $170 billion in real estate AUM is a drop in the bucket compared to that, and BPY's $86 billion in assets represents just 1% of global commercial real estate market share.

(Source: earnings supplement)

And with a record $6.5 billion in liquidity available to it, Brookfield has everything it needs (world class management and access to low-cost capital) to capitalize on the ocean of great opportunities it sees before it.

Basically, Brookfield Property Partners is not just run by the most skilled real estate managers I've ever seen but has a massive growth runway courtesy of a fast-growing total addressable market that dwarfs even its already impressive scale. That translates into one of the most attractive long-term payout and total profiles of any real estate stock, or stock in general, you can buy today.

3. Payout Profile: Safe 7.1% Yield, Fast Distribution Growth, And Sensational Total Return Potential

Fundamentally the most important part of income investing is a stock's payout profile which consists of three parts: yield, payout safety, and long-term growth potential. Along with valuation, this is what determines total returns over time.

Stock	Yield	TTM Payout Ratio	Long-Term Expected Payout Growth	5 Year Expected Annualized Total Returns (No Multiple Expansion)	Valuation Adjusted Total Returns
Brookfield Property Partners	7.1%	86%	5% to 8%	12.1% to 13.1%	15.9% to 25%
S&P 500	1.9%	38%	6.4%	8.3%	0% to 5%

Click to enlarge

(Sources: management guidance, earnings supplement, Simply Safe Dividends, Gurufocus, Fast Graphs, Multipl.com, Yardeni Research, Morningstar, BlackRock, Vanguard, Gordon Dividend Growth Model, Dividend Yield Theory)

BPY's yield is near its all-time high and more than triple that of the market. It's even far above the 5.4% median for REITs. But most importantly that payout is well covered by CFFO, and management's plans to take the payout ratio to 78% by 2022 means the distribution safety will only get better over time.

The other half of the payout safety equation is the balance sheet. We've already seen how BPY's apparently alarming debt levels are not what they appear. The LP has a solid investment grade credit rating, low borrowing costs, and neither credit rating agencies nor bond investors are worried about its debt burden. That's due to its masterful use of non-recourse asset level borrowing and plans for bringing the debt/capital ratio down to a safe 50%.

As for long-term payout growth potential, 5% to 8% is what Brookfield is targeting, with management hinting that GGP's massive increase in new development backlog will put actual distribution growth closer to 8% in coming years. That's realistic given that BPY has a track record of 9% CFFO/unit growth and is planning to keep growing its cash flow at 7% to 9% over the long-term. The massive growth runway and $6.5 billion in liquidity make me think that's a reasonable target.

Ultimately this means that BPY, even assuming its valuation never recovers from its current ludicrously low levels, should deliver at least 12% to 13% total returns. For context, the S&P 500 has historically delivered 9.2% total returns, and the Gordon Dividend Growth Model (what Brookfield uses for its total return models) estimates the market will generate 8.3% returns over the coming decade. Morningstar, Vanguard and BlackRock expect just 0% to 5% CAGR total returns from the S&P 500 over the next five to 10 years. This makes BPY almost certain to be a market-beating stock, even if the rock-bottom valuation never improves. And along the way you'll enjoy:

• a yield that's among the highest of any blue-chip REIT
• one of the fastest payout growth rates in the industry
• potentially eye-popping total returns if management succeeds in closing the valuation gap

Which brings me to the last reason why Brookfield Property is the stock I'm most excited to both be buying aggressively, as well as recommend for any income investors comfortable with its unique and complex risk profile. Simply put, BPY is the most undervalued high-quality real estate investment I know of, and is a screaming buy right now.

4. Valuation: World Class Assets And Management At A Fire Sale Price

BPY Total Return Price data by YCharts

BPY investors have suffered vast underperformance over the past year, both relative to REITs as well as the market. But while some see that as a sign this is a "value trap" to be avoided, that price chart sets contrarian value investors' hearts racing with excitement. That's because Brookfield Property is now trading at its lowest valuation...ever.

Price/ FFO	Historical P/FFO	Implied 10 Year FFO/Unit Growth Rate	Long-Term FFO/Unit Guidance
9.0	10.3	0.3%	7% to 9%

Click to enlarge

(Sources: Fast Graphs, Benjamin Graham, management guidance)

As you can see, the market's long hatred of this LP has meant that its price/FFO ratio has always been among the lowest in the sector. But today BPY is trading at a cash multiple that bakes in nearly zero long-term growth. Remember management has delivered 9% historical CFFO/unit growth and expects to deliver about 8% growth through 2022. If Brookfield can deliver on its guidance (and their track record on that is excellent) then BPY is potentially set to see massive multiple expansion.

NAV	Price	Discount To NAV	5 Year Median Discount To NAV
$28.42	$17.66	38%	19%

Click to enlarge

(Sources: earnings supplement, Fast Graphs, Gurufocus)

Another popular valuation method for REITs is the premium/discount to net asset value, ie book or intrinsic value (of the assets). BPY has usually traded at a substantial discount yet today the discount is near its all-time high. I've already gone into great detail about the three ways management plans to close that gap, and I expect that eventually, they will succeed. That will likely result in significant capital gains as the valuation returns to fair value. How much capital gains?

To answer that I turn to the final valuation method I use for real estate stocks which is dividend yield theory or DYT. DYT was popularized by asset manager/newsletter published Investment Quality Trends in 1966. For 52 years IQT has exclusively used this valuation approach to recommend quality dividend stocks and has achieved decades of market-beating returns (with about 10% less volatility to boot).

(Source: Investment Quality Trends)

DYT says that for dividend stocks with stable long-term growth rates, the yield will cycle around a relatively fixed point that approximates fair value.

Yield	5 Year Average Yield	5 Year Median Yield	Estimated Fair Value Yield
7.1%	5.0%	4.8%	4.9%

Click to enlarge

(Sources: Simply Safe Dividends, Gurufocus)

That's indeed been the case for BPY, whose five-year average and five-year median yields are nearly identical. I estimate that the stock's fair value yield is about 4.9%, the level it will eventually return too once the market finally stops ignoring its strong and improving fundamentals.

Estimated Fair Value	Discount To Fair Value	Upside To Fair Value	5 Year CAGR Valuation Boost	Total Return Potential
$26	31%	45%	3.8%	15.9% to 18.9%

Click to enlarge

(Sources: Simply Safe Dividends, Gurufocus, Dividend Yield Theory, Money Chimp, Management Guidance)

DYT estimates that BPY is 31% undervalued which would translate into a 3.8% CAGR return boost over the next five years. Or to put another way, buying today means a valuation so low that the stock price is likely to outperform cash flow and distribution growth by nearly 4% over the coming years. DYT thus estimates (in conjunction with the Gordon Dividend Growth Model) that BPY is likely to deliver 16% to 19% total returns through 2023.

Management's 25% upper range for annualized total returns is based on the stock eventually trading at a 14% premium to NAV (which will grow by 47% over the next five years). That's not a crazy assumption given the objectively above average nature of both its assets and management team. Whether or not that actually happens, the point is that buying these kinds of quality real estate assets, managed by the Berkshire of global real estate, at a 38% discount to NAV is almost certainly a good long-term investment.

Thus I'm more than willing to pound the table with a "very strong buy" for any patient, high-yield value investor who is comfortable with the risk profile. Just make sure you're willing to wait out the market's irrational hatred of the stock, which might last a few more quarters or even a few years.

Bottom Line: Now Is Literally The Best Time Ever To Buy This World Class Real Estate Investment

Don't get me wrong, I'm not a market timer and I can't predict when Brookfield Property Partners will bottom nor when it will return to fair value. What I do know is that BPY represents some of the world's premier quality real estate assets and its run by a skilled management team with a great track record of Buffett style opportunistic value investing and sensational 26% long-term returns on investments.

Ultimately Brookfield Property Partners (and its BPR REIT alternative) offer high-yield income growth investors the chance for a safe 7.1% distribution/dividend, that's likely to grow at 5% to 8% over the long-term. That's courtesy of Brookfield's global reach, and access to $6.5 billion in liquidity, which will only increase over time.

Best of all, from today's fire sale valuation, there is very little downside risk to either stock, given the 38% discount to NAV. That means that at the very least investors can expect about 15% total returns purely from current yield and future payout growth. But given management's three-pronged plan to close the valuation gap (deleveraging, buybacks, and continued strong growth) BPY has the potential to deliver up to 25% CAGR total returns over the next five years.

That kind of total return potential, from one of the industry's highest-quality blue-chips, makes BPY (and BPR) screaming buys that I'm happy to pound the table about all day long. What's more, I'm putting my money where my mouth is which is why last week I bought $15,000 more of BPY, more than doubling my position and making it my third largest holding. And rest assured that, as my highest conviction buy right now, should BPY continue to fall, I'll "catch a falling knife with conviction" by buying it at ever more insanely great valuations. All while sleeping very well at night knowing my hard earned money is in the hands of the Berkshire of global real estate.

Analyst’s Disclosure: I am/we are long BPY. 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.