TR Property (TRY ) heralded a ‘genuine turn in the income story’ that helped the trust emerge victorious in a ‘tug-of-war’ six months which tested the real estate market.

The £1.3bn portfolio of property securities reported a 10.6% increase in net asset value (NAV) in the six months to end of September and a share price increase of 12.4%. Both measures beat the 9.6% return from the FTSE EPRA/NAREIT Developed Europe Capped benchmark.

Best known as a pan-European investor in real estate investment trusts (Reits), last year it made a push back into bricks and mortar for the first time in nine years, and manager Marcus Phayre-Mudge admits it has been a tricky time.

‘This period has been a classic tug-of-war: political uncertainty and higher-for-longer rates on one side, solid real estate fundamentals and a flurry of corporate activity on the other side,’ he said.

However, the positives have ‘quietly pulled ahead’. Phayre-Mudge flagged easing finance costs that have put corporate activity ‘back on the front foot’ and a short supply of high-quality.

‘It is not a fairytale recovery, but the building blocks for further progress are firmly in place,’ he said.

A recovery in revenues helped drive strength in the portfolio, up 23% over the period, allowing the board to increase the interim dividend to 5.75p per share, although it is still uncovered.

Chair of TRY Kate Bolsover said the half year marked a ‘genuine turn in the income story’ and momentum in income is ‘rebuilding’, with the direct property assets contributing ‘meaningfully’ with a 69% rise in income.

‘After several years in which uncertainty has overshadowed fundamentals, it is encouraging to see full dividend cover move back into sight − complementing healthy share price and net asset value returns,’ she said.

Consolidation wins

The half-year period saw plenty of takeover talk, the largest battle being fought between private equity giant KKR and Primary Health Properties (PHP) for Assura assets, with the latter emerging the winner.

TRY held stakes in both PHP and Assura, and Phayre-Mudge said he was pleased to see the assets ‘remain in the public domain  rather than being sold at a low point in the valuation cycle’.

A ‘congenial merger’ of two European healthcare Reits, care home investors Confinimmo and Aedifica, was agreed in the period, creating the fourth largest healthcare Reit in the world.

‘We owned the higher quality business Aedifica and not the acquired,’ said Phayre-Mudge.

‘Whilst we welcome the larger entity, the transaction was not on our radar as a possibility given Cofinimmo’s 20% Brussels office exposure, which Aedifica will now need to resolve and dispose of. Not owning Cofinimmo was costly to relative performance.’

There was one privatisation over the period, as industrial warehouse investor Warehouse Reit (WHR ) was acquired by Blackstone after what Phayre-Mudge described as a ‘torturous’ sales process that saw the private equity behemoth reduce its initial offer, then increase it following a counterbid from Tritax Big Box (BBOX ).

Despite the bidding war, the deal was completed at 115p per share, which was still 12% below the last published NAV.

Phayre-Mudge only bought back into Warehouse Reit in March this year, following the Blackstone bid for Industrials Reit, having briefly owned it in 2023.

‘The investment premise was that public markets were not attracted to this sub-scale portfolio, nor its management structure, and that a private equity buyer with a stronger management platform would bid a premium to the share price − but still a discount to NAV − which investors would jump at,’ he said.

‘We were proven right and therefore sold our position to Blackstone in July, making an average return of 15% over the four-month holding period.’

Snapping up stakes

Over the period, TRY increased its stake in German residential group TAG, participating in a capital raise when it acquired more assets in Poland, an area of the business in which Phayre-Mudge remains ‘very optimistic’ on.

He reduced the holding in Vonovia from over 5% to under 3.5% as German long bund yields stabilised.

‘As the largest and most liquid real estate equity name in Europe, it remains the easiest way for generalist investors to express any renewed conviction if bund yields continue to tighten,’ he said.

Phayre-Mudge is also standing by UK-listed Phoenix Spree Deutschland (PSDL ), which is 2.7% of the portfolio but remains heavily discounted at 31%.

He is hopeful that a ‘game-changing debt restructure will be announced’ that would ‘allow the company to begin the process of returning capital to shareholders given that it has successfully initiated the planned process of selling flats in Berlin’ − an area that boasts the cheapest residential market in any European capital.

The ‘cathartic’ consolidation seen in the sector is ‘coming to an end’ for the smallest companies but Phayre-Mudge argued that property remains the ‘ultimate value equity’ but no-one wants to hold it, despite the ‘supply-demand disequilibrium for prime assets in all sectors’.

He said the ongoing lack of enthusiasm for the sector has meant TRY’s discount has only narrowed modestly and currently sits at 9%.

‘We are confident that the outcome will be viewed positively, with a smaller number of more efficient businesses providing greater liquidity and driven by management teams aligned with shareholders,’ he said.