Property fund manager ups risk in bid to boost performance

The year to April 2025 was challenging for the European property-securities sector. TR Property Ord (LSE:TRY)’s portfolio, while delivering a negative net asset value (NAV) return of -2.5%, held up better than its FTSE EPRA NAREIT Dev-Europe benchmark, which fell -3.8%. However, a widening discount made for a weaker share price return of -4.9%.

The first half of the period, as European property securities recovered, was strong and TRY produced double-digit returns in both NAV and price. However, as uncertainty befell markets in lieu of the UK Budget, fraught elections in France and Germany among other factors, long-term borrowing costs climbed and duration assets including property securities struggled.

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The numbers in detail (for financial year to 31 March 2025)

Net Asset Value (NAV) Return: -2.5%
Share Price Total Return: -4.9%
Benchmark Return (FTSE EPRA NAREIT Developed Europe): -3.8%
Premium/Discount: -10.1% (vs -7.5% at prior year end)
Full-Year Dividend (proposed): 15.9p (vs 15.7p in prior year)
Gearing: 18.5% (vs 10.8% at prior year end)

Outlook

Despite volatility and weakness in valuations, the fund manager and chair point to the opportunity across TRY’s portfolio. Fund manager Marcus Phayre-Mudge’s previous predictions of increased M&A activity proved true, and he anticipates a continuation of this trend. Conviction in the long-term potential of the portfolio is underpinned by an overall increase in gearing levels from 10.8% to 18.5% at the end of the one-year period. Its current discount is -8.8%.

Discount

The investment trust’s discount, while having narrowed to under 4% at multiple points in the year, opened to just over -10% by the end of the period – a materially deeper level than five- and 10-year averages.

Portfolio

Turnover appeared higher in the year, in part due to the substantial amount of M&A activity across TRY’s portfolio, as well as profit taking and some repositioning.

For example, in light of acquisitions/bidding activity, positions were entirely liquidated in UK Commercial Property Trust and EuroBox, while TRY participated in placings for Spanish names Merlin Properties SOCIMI SA (XMAD:MRL) and Inmobiliaria Colonial SOCIMI SA Shs from reverse split (XMAD:COL), before exiting.

Phayre-Mudge also took profits from Swedish residential company Fastighets AB Balder Class B (OMX:BALD B) following a rally, while trimming another highly leveraged Swedish name, Catena AB (OMX:CATE). A new addition is the £260 million Schroder Real Estate Invest Ord (LSE:SREI) Trust, with Phayre-Mudge viewing that consolidation among small REITs will be a positive. Taking advantage of price weakness, Phayre-Mudge added to Shaftesbury Capital (LSE:SHC), which invests in London’s West End, and to his position in student housing provider UNITE Group (LSE:UTG).

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The largest sector allocations are to industrials (circa 16%), German residential (c.16%) and European shopping centres (c.12%). The direct property allocation stands at a low 3%, reflecting the relative attractiveness of listed-property assets. Moreover, a longstanding direct property holding was sold, which reduced exposure.

Two new industrial properties have been purchased in Bicester and Northampton and the existing industrial property in Wandsworth is undergoing refurbishment.

Gearing

Gearing, which is enacted through a range of facilities/instruments, was drawn on throughout the year, increasing from 10.8% to 18.5% by period end (currently 17%).

Dividend

Revenue earnings per share grew 7.8% and TRY proposes a full-year dividend of 15.9p, representing growth of 1.3% versus the past year, modestly utilising revenue reserves. Nonetheless, there were headwinds to portfolio income in the period, declining rental income due to reduced direct property exposure, increased interest costs and taxes, and instances where M&A participation took precedent over capturing dividends.

ii View

Following last year’s strong absolute and relative performance, TRY’s portfolio held up better than its benchmark in what was a very mixed year for European property securities, outperforming in the first half and underperforming (marginally) in the second in NAV terms. However, the deterioration of the discount, which saltated high to low in the year hampered the ultimate return to investors.

Despite the disappointing absolute return in the year, there were points of strength. The amount of bidding and acquisition activity that Phayre-Mudge and team navigated is testament to the fact that, while equity markets may overlook the lowly valuations of the listed-property sector, other actors will recognise value in quality assets. Recognising this temporal opportunity Phayre-Mudge seeks to capitalise with a gearing level elevated into the high teens. Examples of activism and participation in corporate actions offered by the manager’s detailed review give insight into TRY’s engaged and genuinely impactful role as an active steward within the real-estate equities universe. Progress was also made within the direct property portfolio where, following a disposal, new assets have been acquired while other one asset undergoes refurbishment, although this did contribute to a rough halving in rental income overall versus last year.

TRY proposes another year of dividend growth (1.3%), however this will again be supplemented (to the tune of 18.4%) by the revenue reserve as dividends and rental income within the portfolio were hampered in the period by seemingly transitory factors explained above. Revenue earnings per share grew by nearly 8%, showing progress in recovery from the acute fall in the prior year and encouragingly, many portfolio companies that suspended dividends are resuming distributions once more. While it’s forecast that TRY will likely again draw reserves in the 2026 period to fund further dividend growth, unpaid reserves are substantial and there is visible progress in the recovery of earnings.

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Property is an inherently leveraged and rate-sensitive asset class. The macro tumult and lively rates’ environment of the past 12 months made for indiscriminate derating for listed-property investors. In spite of operational strengths within TRY’s portfolio, a positive contribution from the small physical property allocation and some rewarding results from M&A activity, the trust was largely caught up in a sector-wide sell-off. While macroeconomic noise will temper short-term performance, long-term returns for the trust are well in excess of benchmark returns and outperformance has been consistent throughout the trust’s lifetime.

Ultimately, the trust offers a unique and well-managed approach to investing across direct and listed European property, benefiting from a hybrid closed-ended structure and an abundance of management expertise. The listed portfolio is well diversified across both countries and sectors, while the direct property allocation gives the team a finger on the pulse of the asset class underlying the listed universe.

The yield of 4.7% is attractive given the possibility for capital growth on offer and the (barely) double-digit discount that marred price returns in the period, and has narrowed since period end to just under 8%, still represents a cheapness versus historical averages while being far less severe than trusts investing in predominantly direct property.

The trust forms part of interactive investor’s Super 60 list of ideas as an adventurous option.