TR Property’s long-term returns put most other investment trusts to shame. What’s even more remarkable is that it’s smashed the market without focusing on traditional high-growth areas like technology, small-caps, or Asia.
Here’s a table showing the top trusts of the last two decades that I’m fond of using. TR Property sits proudly at #10:
Another one that got away?
TR Property has a rich history, dating back over a century, but it has only specialised in property since 1982.
Prior to 1982, its brief was somewhat, er, vaguer. According to its 1981 accounts, the objective of the company was:
To increase the wealth of shareholders by whatever means appropriate at any particular time.
I think that’s called wriggle room.
Marcus Phayre-Mudge, aged 51, has been the fund’s manager since 2011, although he has been involved in the fund’s management team since 1997.
He initially qualified as a Chartered Surveyor and worked at Knight Frank before moving into the investment world. There’s an excellent 13-minute presentation here that he recently gave about the case for property investing if you want a flavour of his style.
I first remember coming across TR Property in the 1990s. It was run by Henderson at the time and trading around 40p. I never bought it, although I think I came close to doing so. It’s ten times the price now, plus it’s paid out dividends of 3-4% each year.
Chris Turner (the previous fund manager and who was also very well regarded) and Phayre-Mudge (then his deputy) departed Henderson for Thames River Capital in 2004. The trust’s investment mandate went with them.
Thames River and many of its funds struggled in the aftermath of the financial crisis. It ended up being sold to F&C in 2010, which in turn was bought by BMO in 2014.
Of the dozen or so trusts that BMO runs, it’s one of just three that have kept their previous non-BMO branding (the others being F&C Investment Trust and European Assets).
Key stats for TR Property
- Founded: 1905
- Previous name: The Trust Union (until 1982)
- Ticker: TRY
- 10-year net asset return: +260%
- Benchmark used: FTSE EPRA Nareit Developed Europe Capped Index (Net, GBP, Total Return)
- Current price: 424.75p
- Indicated spread: 424p-425.5p (0.4%)
- Exchange market size: 5,000
- Results released: May (finals) and November (interims)
- Market cap: £1,348m
- Net assets / premium: 426.8p / 0.5%
- Costs: 1.16% OCF (including performance fee) and 1.54% KID
- Gearing: 13% as of 31 July 2019
- Current dividend and yield: 13.5p and 3.2%
- Dividends paid: January (interim) and July (final)
- Style: Quoted European property companies, plus a little direct property investment
- Links: Website and AIC page
Property companies or REITs?
It’s been a while since I have had a good look at the quoted property sector, so I thought it was worth refreshing my memory of what’s on offer.
There’s certainly no shortage of real-estate specialists on the London Stock Exchange. Excluding housebuilders, which is a specialist sector in its own right, I reckon there about 125 companies in total.
While a few of these are property services firms, like Foxtons, Savills, or Purplebricks, the vast majority directly own physical properties and rent them out. However, they come in a few different forms…
According to the London Stock Exchange, 56 listed property companies, including most of the larger players, are real-estate investment trusts (REITs). Some of these companies have REIT as part of their official name (Tritax Big Box REIT, for example) but most of them don’t.
The concept of REITs was first introduced in the US in 1960. Many other countries have since launched their own versions, including the UK in 2007.
UK REITs have to distribute 90% of their income to investors each year and be resident in the UK. The dividends they pay (or part of them) are classed as property income for tax purposes, which can be an issue for those owning them outside of an ISA or SIPP.
Or property investment companies?
The AIC, the trade body for investment companies, lists 39 property investment companies on its website, broken down into seven sub-sectors:
- Debt (4 companies)
- Europe (6)
- Rest of the world (2)
- UK commercial (19)
- UK healthcare (2)
- UK residential (5)
- Property securities (1)
The majority of these, 24 to be precise, are also REITs.
If you want to take a high-level view of the whole sector then there’s a mish-mash of company types to consider. While I don’t think it matters too much when choosing one investment over another, I like to see the whole picture before delving into the detail.
- not all listed property companies are REITs;
- not all REITs are classed as property investment companies and so covered by the AIC website and other investment trust news sources; and
- not all property investment companies are REITs. I presume those that aren’t are mostly either non-UK resident or invest in property debt rather than property.
To make matters a little more confusing, a few companies have left the AIC’s property universe in recent years.
For example, Picton Property Income departed in 2018 and, earlier this year, Primary Health Properties left after merging with MedicX.
This year also saw Empiric Student Property leave the AIC universe although its close rival, GCP Student Living, remains.
TR Property stands alone
TR Property seems pretty unique among property investment companies.
While all the rest tend to invest directly in physical properties, TR Property invests most of its money in other property companies. It does dabble in the physical, but at just 8% of its portfolio, it’s really just a sideshow.
And of the 39 companies listed by the AIC, TR Property has the best 10-year net asset value return. It’s near the top for 5-year returns as well.
Somewhat surprisingly, to me anyway, only 11 of the 39 property investment companies the AIC lists actually have a 10-year record. I suspect that the new REIT legislation and the hunger for income from alternative assets are behind the explosion in the number of funds.
Of those would with a track record of at least a decade, only three (BMO Commercial Property, Schroder Real Estate, and Standard Life Investments Property Income) come close to TR Property’s performance. Each of them would have more than tripled your money.
Here’s how the TR Property portfolio looked as of March 2019:
The portfolio weightings have changed a little since the 31 March year-end, with larger positions in Unibail-Rodamco-Westfield, Unite Group (after it acquired Liberty Living), Gecina, and LondonMetric (after it took over A&J Mucklow).
The UK dominates, accounting for just over 40% of the portfolio (all TR Property’s direct investments are in the UK as well).
Germany, France, and Sweden are the other three main countries the trust is invested in, collectively accounting for 48%.
Over 9% in Sweden looked odd to me at first sight, but compared to the European property benchmark TR Property measures itself against, it’s pretty much on the money:
It’s a fairly concentrated portfolio, with the top twelve positions accounting for 58% by value. And five of the top six are non-UK.
Here is Phayre-Mudge’s thinking on preferring the UK right now:
The Trust’s UK overweight requires explanation. In summary, I have been increasing exposure to index-linked, long-dated and secure income streams. Although all our Continental European companies have index-linked income, the average lease length is much shorter than the growing list of UK companies with these long-dated income streams.
We therefore have significant exposure to healthcare, budget hotels, leisure and supermarkets. We remain under exposed in terms of equities to Central London office, retail and particularly residential preferring our own assets at Wandsworth and Bayswater.
TR Property has been wary of retail property companies for a long time now and critical of the excessive borrowing that many firms have persisted with.
UK retail, it says, “feels like a drama box set where a new season brings new villains and more tragedy”. The problem seems less acute across Europe where leases are shorter, there is no system of upwards-only rent reviews, and online shopping isn’t (yet) as popular.
Brexit could obviously have an impact on the UK property market, but TR Property seems to have positioned itself to ride out the turbulence. As well as its preference for long leases, it also likes companies with lower levels of borrowing.
Now TR Property has grown so large, can it remain nimble?
Most of its largest positions account for 3% or less of that company’s shares. For example, it owns less than 1% of Vinovia, which is its largest single position. McKay Securities, where it owns nearly 16% of the outstanding shares, seems to be an outlier.
As for self-imposed investment limits, TR Property sets itself the following:
- UK: 25-50%
- Europe ex UK: 45-75%
- UK direct: 0-20%
- Gearing: 10% cash to 25% debt
It’s in the middle, more or less, for each of these four measures right now.
I thought this performance table in TR Property’s latest annual report was worth reproducing. The first year, to 31 March 2009, is the low point of the financial crisis, but progress since then has been excellent.
We can see that the company pretty much matched its benchmark from April 2008 to April 2012. But in the seven years since then it’s been ahead each year, and by a decent margin each time as well.
TR Property yields a little less than most other property investment companies. Around 5% is more typical, but its dividend growth has been very impressive, especially in the last three years:
The overall charges for TR Property aren’t that low with an OCF of 1.16% including the performance fee and 0.63% without. But there are a couple of pleasing aspects to note.
First up is the structure of the management fee. It’s a fixed fee of £3.6m plus 0.2% of net assets.
So, with net assets of roughly £1.35bn, the fixed element represents 0.26%. The variable element takes that up to 0.45%, but this should continue to fall as assets climb over time.
There is a performance fee as well. It’s good to see that TR Property has to outperform its benchmark by 1 percentage point before this kicks in. It’s payable at 15% and it’s capped at 1.5% a year (or 1% if net assets fall). Any under or overperformance is rolled forward.
Director pay seems reasonable at around £180,000 spread over four directors and the directors own about £300,000 of shares between them.
It’s hard to see any negatives with this investment trust.
Its performance record is remarkable. Despite its heavy UK-weighting, it’s continued to do well these past few years when European property companies have produced much better returns.
The fee structure is innovative, too. Performance fees seem to be falling out of fashion, albeit slowly, but they’re not something I have a particular issue with when they are set at a sensible level.
It’s trading at a very small premium to net assets right now, which is quite unusual compared to the last decade when it’s largely been at a discount of between 5% and 15%. Of course, quoted property companies also tend to trade at a discount to their own net asset value, so that complicates the situation a little.
I’ve already got a decent amount of property exposure, albeit not via the stock market. But I could be tempted here, especially if the discount situation becomes more favourable.
Please note that I may own some of the investments mentioned above -- you can see my current holdings on my portfolio page. Nothing on this website should be regarded as a buy or sell recommendation as I'm just a random person writing a blog in his spare time and I am not authorised to give financial advice. Always do your own research and seek financial advice if necessary!
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