TR Property 27 October 2021

TR Property (TRY) offers exposure to the property market via the equities of companies owning property. As such it has a number of key advantages over investment in a direct property investment trust. Manager Marcus Phayre-Mudge is able to be much more flexible and nimble in his asset allocation, and make medium-term tactical trades as well as longer-term investments. He can also more easily invest in alternative sectors of the property market when they are facing a strong outlook.

Marcus also invests across continental Europe as well as the UK, which means he and his team have multiple levers to pull in search of alpha. He aims to take advantage of national and local business cycles as well as broader secular themes, but his investment decisions are built on rigorous stock-specific work. There is a tilt towards quality, as we discuss in the Portfolio section, which can be important to understanding relative returns.

Over the past five years the trust has performed well versus its benchmark (see the Performance section) and outperformed in NAV and share price terms the average return in the AIC UK Commercial Property sector of direct property trusts. The bias to quality, to small caps and the small allocation to physical property all reduce the beta to the market, but this is more than offset by consistent levels of gearing.

Despite the impact of the pandemic on the revenue account (a c. 24% reduction in FY 2021), the board raised the dividend over the past year and remain committed to doing so again as long as they believe the income will recover in the medium term and they have the reserves to do so – see the Dividend section. This is in contrast to the direct sector, where dividends on the generalist trusts are still mainly below their pre-pandemic levels. TRY trades on a small discount of 4% as of 21/10/2021.

TRY is a great way to capture the growth and income potential in commercial property without some of the drawbacks of direct property investing. This includes the much longer time taken to buy and sell properties which means positions cannot be easily unwound, and the greater uncertainty of the portfolio value given infrequent, non-market valuations. Marcus can be nimble with his investment decisions and take tactical positions as well as long-term strategic ones which we think has helped him generate alpha over the long run.

The relative solidity of the dividend is another attractive feature. The board was able to use revenue reserves to grow the dividend in FY 2021, and retains a decent reserve for future use. We think the flexibility of Marcus’s remit means the board can have greater confidence in the ability to repair the income account over the short to medium term.

While the market worries about inflation, it is worth remembering that much of TRY’s revenue is index-linked. Marcus’s quality growth strategy should mean his portfolio is more resilient to economic news, even if this cannot offset entirely the economic sensitivity of property. We think the strong performance in income and capital terms through the crisis show the strength of the strategy. However, we note the discount is narrow relative to the five-year average of 5.6% and, in the short-term, the economic sensitivity of the property market could work against the trust if there is a setback to the recovery.