Not to say that there is no strategy involved. Sure there is. As is for all civ exploits, until they get nerfed in some patch for being too good.
The tactic was documented before the patch, and yet they haven't touched it when they revised the warmongering penalties. It seems far more an intentional design than something they failed to take into account in the new philosophy of the game regarding wars and conquest.
You can't repeat that tactic too often without getting into diplomatic trouble (the city taking doesn't get you warmongering points, but the DoW itself still does and enough to give you modifiers if you have enough civs with a high hate factor for warmongers in your game, and it takes 50 turns for each one to completely fade away). It can be mitigated if the Civ you attack is the friendless black sheep, but then so is pure conquest against him as it's easy in both cases to bring with you war allies and halve all the penalties.
But if you try to exploit this by attacking a neighbor, get a city, then attack another and get a city etc. than rinse and repeat you will still get in much the same diplo problems taking cities by force gets you in, unless you have a lot of very good friends or are so strong the warmonger-haters don't dare even to denounce you.. If you rise your amount to 700-750 (for three consecutive wars over 25 turns, say), it's higher than the warmonger amount for taking a city when a standard map is half settled (around 400 points), and beside acquiring big cities that way also pisses off many AI as you are expanding too fast to their taste. Even puppeting a city as Venice gets you that modifier. I got the "our advisors are worried about your expansion" followed by a denouncement for buying a big CS a few times from the less friendly AIs while playing as Venice, or for taking big cities in peace deals). Another factor that balances out that tactic is that taking a city this way
doubles the unhappiness that hit you compared to capturing it, since the population isn't halved. That often stops you from exploiting it, precisely because you can't afford to expand this way too much or very fast. Over the course of a game or a long period of it, you can acquire slowly most of the land of a rival, that's true enough. But it's not an exploit, it's a valid expansion strategy, one that mimicks the expansion of several empires or nations, incl. the Austrian one, and Venice's, and for that matter France's slow territorial expansion.
Diplo-wise It takes longer to get in trouble that way, true, but you also acquire cities much slower than if you launched a campaign to take 2-3 or more in one war... So it's balanced. The only thing that isn't balanced in this and that should be changed is that if you raze the city you're given you escape the warmonger penalty. That isn't right. It's no longer taking control of a city peacefully in a diplomatic exchange following a war, it's still a massacre and destruction. There should be razing a small penalty added to the present warmongering one, and if you do it after getting a city in a peace deal, you should then receive the full warmongering penalty just as if you took the city by force + the modifier for the massacre of the population. It would be logical to even add a hit for backstabbing, since you accepted a city peacefully than massacred it.
Calling this "an exploit" is a bit for me like saying that when the Papal, French or Imperial forces were moving armies in Italy, fought a big battle or two, took fortresses, layed siege to a few cities in order to force Milan or Venice to sign 5-6 cities and their lands away in a peace treaty it wasn't the right way to fight a war or seek to expand your territority, and it wasn't better to fight this way than sacking cities and killing its population. Countless time in history nations have signed away cities and territory to stop a foe from hammering them, to prevent a massacre of the population, or because they had run out of money for mercenaries or to pay their forces, or because they were getting so weakened they needed the peace to rebuild or another foe my exploit their weakness and attack them (eg: Venice signing cities away because they couldn't afford the costly war with the Pope and preparing for an eventual Ottoman attack on their colonies at the same time. Typically this leads to other wars to regain the territories signed away, or to claims they were unjustly gained and still rightfully yours). Getting cities in treaties is pretty much the way territories kept switching hands for much of European history.
(A mechanics I wouldn't mind added is that in peace deals you might offer control of cities for "x turns" - getting the science, production, luxuries etc. for those turns, but not permanently). That was also done quite often historically... and most often not honored when time came. The AI could come tell you "You promised to give us back City X after 30 turns. It is time", with the choices : "Of course, we will honor our word" and "If you want it, come and get it".)
You'll notice that when the AI perceives itself weak and has too many enemies (e.g. it's been chain denounced) or you have war allies it doesn't take much for it to give you a city for peace, while if the AI doesn't fear you and his other enemies enough, it won't accept, or force you to wage war long and hard before it gives up, sometimes you even need to take a city to get another in the treaty. It's all quite logical. It doesn't look like a flawed mechanics to me, I'm pretty sure it's in the game by design. I'm not sure what convinces you so much it's a loophole and exploit. They haven't removed war and conquest from the game, they just made it more strategic so that you can't focus mostly on units, go and steam roll everything while having Consulates for happiness, and still be able to retain decent alliances with other Civs in between the waves of conquests, which definitely
was an exploit of the AI's lack of perception of the threat such players represented - now that loophole is closed as the AI spots this strategy early, and after not very long will try to stop you. It's nothing new, that thinking was introduced when they stopped making domination be about conquering everything, BNW just took another step in that direction, and I'm quite sure it's not to "punish" those who still played the game as strictly a war game (it's more like they didn't let that play style be a priority to them, nor did they let its crippling get in the way of making the game more complex and better for those who play it more in the various ways they designed the game to be played).