TR Property 18 October 2019

TR Property (TRY) aims to generate total returns from investing in the equity of UK and European listed property companies. It also owns a small portfolio of direct commercial property in the UK. Within the total return objective, the trust’s dividend is an important consideration for the board and managers.

TRY’s management team is made up of commercial property specialists who invest in property securities across Europe. Underpinning the investment process is a desire to invest with management teams who have delivered successfully through cycles. Manager Marcus Phayre-Mudge also takes a top down view on economies and economic prospects believing this is the fundamental driver of property and rental values. The big top down (and successful) call that Marcus took after the Brexit referendum was that traditional UK property sectors would be ‘dead water’, and so he has re-allocated overseas, but also shifted focus in the UK to niches such as student property, medical property and long-lease properties.

A unique feature of TRY is that it also owns a commercial property portfolio directly. In the managers’ view, this gives them a significant edge over peers, given the market intelligence that owning a direct property portfolio gives when evaluating listed property companies, and meeting with other managers.

At 14%, gearing is broadly in line with the level employed over the last five years. It is worth noting that given the underlying gearing of the property companies that TRY owns, the ‘look-through’ LTV, is in the order of 42% according to the managers, in-line with the benchmark.

TRY has been a standout performer relative to the benchmark, having outperformed in ten out of the past 11 financial years. As we discuss in the Portfolio section, the company has exactly the same currency exposure as the benchmark, and so all of this outperformance has come through stock picking or asset allocation.

Currently, the historic dividend yield on the shares is 3.2%. While not in the formal objective, we understand that the board sets a lot of store by the managers’ ability to continue to grow the dividend. Since the 2009 financial year the company has paid a covered dividend in all but two years and grown the dividend by a compound annual growth rate of 8.9%.

For flexible commercial real estate exposure, TRY is (literally) in a class of its own – and not just because there are no really comparable peers in the investment trust universe. TRY exploits all the advantages of the investment trust structure: the underlying investments (holding a wide variety of liquid and less liquid property securities, as well as direct property), the gearing it employs, the progressive dividend supported by revenue reserves and the fact that the independent board has been able to follow the talented management team through several corporate upheavals. As such, it represents an excellent way to get exposure to property as an asset class.

Although TRY has a lower yield than directly-invested property trusts, by investing in property securities for the majority of the portfolio, the managers are able to be significantly more nimble when allocating in different property types, geographies and management groups. As the performance statistics show, shareholders have been well rewarded by being invested in TRY. The managers have demonstrated a consistent ability to outperform through up and down years for the benchmark, all the while paying a steady and rising dividend. The information ratio is remarkably consistent over the years, giving investors reassurance that the relatively low fees (OCF of 0.63%) are being well spent.

TRY offers an excellent specialist addition to portfolios. Certainly, returns will be correlated with the market, but Marcus and his team clearly add alpha on a consistent basis. The discount widening is a risk to be aware of, should sentiment towards the trust change or the property cycle turn decisively south. Whilst the dividend yield of 3.2% is not as attractive as that of the FTSE All Share, it is arguably more reliable, backed by significant revenue reserves and the fact that the FTSE All Share relies heavily on banks, tobacco, miners and oil.