The market has had a love-hate relationship with this big-dividend REIT in 2019, and recently hate has taken the lead, as the shares have sold off. And yet another negative headline this weekend from the WSJ is adding to uncertainty and volatility, thereby making this attractive income-generating options trade even more compelling, in our view. We believe this is an attractive trade to place today, and potentially over the rest of this holiday week as long as the share price doesn’t move too dramatically before then.
The Trade:
Sell Put Options on Brookfield Property REIT (BPR) with a strike price of $17.50 (4.8% out of the money), and an expiration date of January 17, 2020, and for a premium of $0.25 (this comes out to 17.1% of extra income on an annualized basis, ($0.25/$17.50 x 12 months). This trade not only generates attractive income for us now, but it gives us the possibility of owning shares of BPR at an even lower price if the shares fall even further than they already recently have, and they get put to us (and we’d be happy to own BPR, especially if it falls to a purchase price of $17.50 per share).
Your Opportunity:
We believe this is an attractive trade to place today and potentially over the remainder of this holiday week as long as the price of BPR doesn't move too dramatically before then, and as long as you’re able to generate annualized premium (income for selling, divided by strike price, annualized) of approximately 12% to 15%, or greater.
Our Thesis:
Our thesis is basically that BPR is an attractive long-term, big-dividend (7.2% yield) REIT with price-appreciation potential, and the shares have sold off inappropriately. We recently completed a full write-up on BPR, and you can access it here. We concluded that article by writing:
Brookfield Property Partners is a high-quality real estate company that is likely to generate compelling returns over the coming years, through a combination of attractive distributions and substantial share price gains. Brookfield Property Partners units are trading at ~34% discount to net asset value and offering a 7.2% yield. And for these reasons, we've ranked it #7 on our recent list of Top 10 Big-Dividend REITs.
And making this trade even more compelling is a negative headline from the Wall Street Journal this weekend. Here is the headline:
We view this headline as positive for our options trade because it will add short-term uncertainty and volatility to the share price of BPR, and that is the exact thing that adds to the upfront premium income that this trade generates. Specifically, when volatility goes up, premium income goes up, and that adds to the attractiveness of this trade.
As a side note, we found the following chart from the WSJ article, interesting, and we’re sharing it simply for a little more perspective on BPR (in addition our full report on BPY that we linked above).
Important Trade Considerations:
Two important considerations when selling put options are dividends and earnings announcements because they can both impact the price and thereby impact your trade. In this particular case, both are largely a non-issue. First, BPR isn’t expected to go ex-dividend until the end of February—after this options contract has already expired. And with regards to earnings, BPR isn’t expected to announce earnings again until the beginning of February (again after this options contract expires). Had either of these events happened prior to this option trade’s expiration, we’d have to take a closer look at the potential impacts on the trade.
Conclusion:
BPR is an attractive long-term big-dividend (7.2% yield) REIT, and the recent bout of volatility (induced by market uncertainty) makes this income-generating options trade even more attractive. Specifically, the volatility makes the upfront premium income on this trade higher (volatility/uncertainty is the #1 driver of option premium income pricing). As noted earlier, we’ve ranked BPR on our recent list of top 10 big-dividend REITs, however if you’re uncertain about pulling the trigger on a normal buy order, you might consider this trade instead. It’ll allow you to generate attractive upfront income that you get to keep no matter what. And this options trade also gives you a chance of picking up shares of this attractive long-term REIT at an even lower price, if the shares fall even further than they already have, and they get put to you at $17.50. And at a price of $17.50, BPR is an extremely attractive long-term income generator.