Real estate has created fortunes for more investors than perhaps any other asset class. But investing directly in real estate can come with a slew of risks.
Other investment vehicles such as stocks and master limited partnerships can give investors a more convenient and lower-risk way to profit from rising property values -- and with potentially even more upside than direct ownership of real estate. In this regard, here are two companies that are particularly well positioned to deliver strong gains to investors in the year ahead.
The yield play
Investors seeking an income-generating real estate investment need look no further than Brookfield Property Partners LP (BPY). The partnership owns and operates a diversified portfolio of commercial real estate assets spanning five continents and multiple sectors, including office, retail, multifamily, industrial, student housing, and self-storage, among others. With its global reach, Brookfield is able to take advantage of high-return investment opportunities in most major real estate markets across the globe.
Brookfield seeks to generate long-term returns on equity of 12% to 15%. To do so, it uses a value-based, contrarian approach. By investing in areas that are out of favor with other investors -- such as its recent acquisition of mall owner GGP Inc. -- Brookfield is able to acquire high-quality properties at bargain prices. It then uses its redevelopment and operational expertise to increase these properties' cash-flow generation. Brookfield also sells some of its properties from time to time to harvest gains, so it can acquire additional bargain-priced assets.
Recent market pessimism has Brookfield itself trading at a discounted price. Brookfield estimates its net asset value -- the value of its assets minus its liabilities -- at approximately $29 per unit. Today, however, those same units are trading for only $17.60 -- and they yield a hefty 7.1%.
Brookfield expects to increase its cash distribution to investors by 5% to 8% annually over the next five years, fueled by 7% to 9% annual growth in its funds from operations. This cash payout growth, combined with its sizable current yield and discounted price tag, make Brookfield Property Partners LP a great buy today.
Check out the latest Brookfield Property Partners earnings call transcript.
The value play
Value investors will likely also appreciate Home Depot's (HD 2.12%) bargain-priced shares. The home improvement titan's stock is currently trading within about 10% of its 52-week low amid a broader sell-off in the overall market, even as housing trends are boosting the underlying performance of its business.
Rising home prices have been a boon for the retailer. Homeowners tend to spend more on home improvement projects as they build equity in their houses, and this is helping to boost Home Depot's sales. The low supply of homes for sale could continue to drive home prices higher, boosting Home Depot's revenue and profits along the way.
But rather than wait for positive housing price trends to fuel its growth, Home Depot is investing aggressively to modernize its stores. By improving its e-commerce fulfillment capabilities, Home Depot has both increased the sales productivity of its physical stores and become a formidable force in online retail. The company's comparable-store sales rose 4.8% in the third quarter, while online sales jumped 28%.
Home Depot is targeting $120 billion in annual revenue and a 15% operating margin by 2020, up from $105.6 billion and 14.53%, respectively, in the past year. As its revenue and earnings grow, so too should Home Depot's dividend payout to investors. And its shares already yield a solid 2.3%.
Better still, Home Depot's stock can currently be had for only about 18 times analysts' earnings estimates for 2019. That's an attractive price for a high-quality business that's expected to increase its profits by more than 14% annually over the next half-decade. That makes now a great time to consider buying some Home Depot shares.
Check out the latest Home Depot earnings call transcript.