TR Property 21 April 2021

TR Property (TRY) owns a portfolio of pan-European real estate equities, supplemented with a small physical property portfolio. TRY’s lead manager is Marcus Phayre-Mudge, who aims to invest in high-quality property companies supported by strong bottom-up and top-down fundamentals. His approach is sensitive to valuation, and he uses the flexibility afforded by investing in equities (rather than directly into property) to tactically tilt the portfolio – sometimes swiftly - as the investment outlook changes over time.

This flexibility has been useful during the pandemic. Having benefited from his long-standing overweights to high-quality sectors as the initial impact was felt, once the vaccine rally got underway Marcus was able to rotate into some more cyclical stocks before taking profits and rotating back into logistics and high-quality residential plays which had lagged. As we discuss in the performance section, TRY has handsomely outperformed its index and the direct property trust peer group over the short and long term.

TRY pays an interim and final dividend each year and maintained its interim in line with last year’s despite the impact of the pandemic. As we discuss under dividend, we believe the board is in a strong position to use reserves to maintain the final dividend if they so wish. TRY yields 3.4%.

TRY’s shares trade on a discount of 6.8%, which is significantly narrower than the generalist direct property trusts, but closer to the average 7% of the AIC Europe equity sector. Marcus typically runs the trust with a significant level of gearing, and on a net basis, currently 17%, reflecting how attractive he sees the current opportunity set despite the impact of COVID-19.

There are clearly structural issues in retail property, and the outlook for offices is contingent on how companies and workers will react to the end of lockdowns. We think one of the key benefits of investing in property via equities, as TRY does, is the liquidity and flexibility that allows the manager to tactically tilt the portfolio, react to events and trade changing valuations. This is impossible for a physical property portfolio manager given the long lead times for buying and selling assets. TRY’s pan-European remit gives the manager a very broad opportunity set to invest in.

In the short to medium term, TRY looks to be in a strong position to maintain its dividend, and Marcus tells us he is confident the portfolio’s income will return to pre-pandemic levels in 2022 given what he is seeing from portfolio companies. It is possible to receive a higher historic yield on a direct property investment trust at the moment, but the uncertainty of the outlook for their income accounts is, we think, reflected in their much wider discounts, which makes a lower portfolio income translate to a higher share price yield.

In our view, TRY is an excellent way to get diversified property exposure and we think it interesting that Marcus is currently running a significant level of gearing despite the macroeconomic uncertainty, and we think this reflects a real bullishness on his part.