Back in early January, I declared Brookfield Property Partners LP (TSX:BPY.UN)(NASDAQ:BPY) was my top pick for 2019.
I was enticed by Brookfield’s combination of owning attractive assets that were currently trading at a bargain price. The stock traded hands at approximately $22 on the Toronto Stock Exchange, while I believed fair value was closer to $38 per share.
So far I’m happy with my pick, as shares are up substantially. Brookfield Property Partners has a current share price of $25.39, which translates into a 15.3% return on the stock price alone since the beginning of the year.
Add in the company’s generous dividend — remember, the stock yielded well north of 7% back in January — and we have a total return of 19.3%.
Despite this excellent performance, however, I believe the stock is still quite undervalued. In fact, I’ve been recently buying more for my portfolio, convinced shares still offer significant upside from here. Here’s why the stock could easily rise another 50% between now and the end of 2020.
World-class real estate
Brookfield Property Partners owns some of the world’s best real estate. I’m still amazed I get the opportunity to buy so many terrific assets in one place.
Some of the company’s marquee properties are First Canadian Place in downtown Toronto, Potsdamer Platz in Berlin, Canary Wharf in London, Brookfield Place in New York City, and The Fashion Show Mall on the iconic Las Vegas Strip.
The company also owns 123 top shopping centres in the United States — assets it acquired at a nice price after investors fell out of love with the sector.
It has ambitious plans for these malls, including renovating them to further maximize rental revenue and adding multi-family housing to some locations.
Malls offer perks like proximity to transit and convenient access to retail space, which makes them ideal for residential development.
Finally, Brookfield Property Partners also owns stakes in various distressed real estate funds, which have gobbled up interesting assets in sectors like the hospitality industry, self-storage, and student housing.
Despite owning some of the world’s best real estate, Brookfield shares trade at a 35% discount to their net asset value, which is just under US$30 per share.
Getting great real estate is one thing, but buying it at a big discount? That’s exactly what investors should be looking for.
One of the nice things about real estate is there’s no limit to how big a company can grow. There’s always going to be more property it can develop or acquire.
The company targets 10-12% total returns for its core real estate portfolios, as well as 5-8% annual growth. It then passes on the growth back to shareholders in the form of higher distributions. The dividend has been hiked each year since 2015.
Brookfield has a debt-to-assets ratio of just under 50%, which means it should be able to take on the leverage needed to successfully expand its portfolio over time.
50% higher by 2021
At some point, investors will realize how undervalued Brookfield Property Partners shares are and bid them much higher.
Here’s why I think a 50% total return between now and the end of 2020 is very achievable. Remember, shares currently trade at 65% of net asset value. If shares trade increase to net asset value then we have a 35% return right there.
Next, investors can expect to collect a 6.9% yield, pushing us up to a 45% total return. Remember, investors will collect six quarterly dividends from now until the end of 2020.
Finally, Brookfield has to deliver 5% growth in the next 16 months. The company targets 5-8% growth annually, so asking it to deliver that much growth over the next 16 months is very achievable.
The bottom line
Brookfield Property Partners is a fantastic stock that’s trading at a temporarily low valuation. I can’t promise shares will be up by 50% by the end of 2020, but good things tend to happen to investors that load up on quality stocks trading at a discount.
You don’t want to miss out on this opportunity.
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Fool contributor Nelson Smith owns shares of Brookfield Property Partners LP. Brookfield Property Partners is a recommendation of Stock Advisor Canada.
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