This is an attractive long-term 8.8% yield property REIT trading at a compelling valuation, but the shares have rallied hard in recent weeks thereby creating this high-income options trade opportunity. Specifically, nervous investors may slow the short-term rally by taking profits, which is fine with us because we’d keep these attractive shares for the long-term and get paid the big dividend shortly after the options contract expires in just over 1-month from now. And if the shares do get called, that’s a 39-day gain of approximately 20%, not too bad at all. We believe this is an attractive trade to place today, and over the next few days, as long as the price of the underlying shares don’t move too far during that period.
Brookfield Property REIT (BPYU), Yield: 5.2%
We wrote about the attractiveness of Brookfield just last month in this report, and since that time the share price has rallied hard.
And while the shares remain attractive to us over the long-term, the near-term price rally has created an attractive opportunity to pick up a little extra income in the short-term.
The Trade:
Buy Shares of BPYU (if you don’t already own them), and Sell Covered Call Options on BPYU with a strike price of $17.50 (~15.7% out of the money, it currently trades at ~$15.13), and an expiration date of November 20, 2020, and for a premium of at least $0.10 (this comes out to approximately +6.2% of extra income on an annualized basis, ($0.10/$15.13 x (365/39 days, annualized)). This trade not only generates attractive premium income for us now, but if the shares get called within the next 39 days, that’s an additional 15.7% gain for us ($17.50/$15.13), and if they don’t called then we get to keep the upcoming big dividend (the shares go ex-dividend a few days after the options contract expires), and we get to keep holding and attractive long-term investment that we believe will rise considerably over the long-term as we explained in our recent previous BPYU report linked earlier.
Your Opportunity:
We believe this is an attractive trade to place today and potentially over the next few days as long as the price of BPYU doesn't move too dramatically before then. It’s also important for you to take the liberty of “working this trade” a little bit if you can get comfortable—which means (depending on the price) you may be able to generate higher premium income on the trade, and you might even consider different strike prices or options expiration dates. We like the specific date and strike outlined above, but you may see something different.
Our Thesis:
Again, our thesis is basically that BPY is an attractive long-term dividend investment trading at an attractive price. Furthermore, the income generated by this trade (i.e. upfront premium income + the possibility of getting called at a significantly higher price) is also attractive. And if the shares don’t get called before the option expires then we simply keep the premium income generated by this trade, and we keep BPYU’s big dividend payment (the shares go ex-dividend shortly after this options contract expires). And we’d be more than happy to keep owning big dividend payer BPYU for the long-term because the valuation is still relatively low and the dividend is big and attractive.
Important Trade Considerations:
Two important considerations when selling call options are ex-dividend dates and earnings announcements because they can both impact your trade. Regarding the dividend, BPYU goes ex-dividend right after this trade expires, so as an investor you’re either going to get the significant gain from selling your shares at a higher price if they get called, or you’re going to get the next big dividend payment. However, the next earnings announcement will likely come approximately 1-week prior to the expiration of this contract, and depending on the news, the share price could be volatile. However, given the potential outcomes of the trade, and our belief that this business is getting better and worth owing, we’re happy to deal with the uncertainty of what the company may announce (positive or negative) during the next quarterly earnings announcement.
Conclusion:
Brookfield Property REIT has faced many of the recent challenges of the property REIT sector, but conditions have been getting better (rent collections have risen sharply following the initial Covid lockdowns) and we like the support the company continues to receive from parent Brookfield Asset Management (as described in our full report linked above). Covid has been absolutely terrible, but it will eventually be brought under control, and depressed property REITs like BPYU will continue to rebound over the long-term. We like this trade in particular because the outcomes all result in significant income payments (options premium income, a potential sale at a large gain, and the upcoming big dividend), plus we like BPYU as a long-term investment. If you are an income-focused investor, owing BPYU and placing this options trade is worth considering.