TR Property (TRY ) manager Marcus Phayre-Mudge has called on property trusts to raise cash despite their hefty discounts to help speed up the consolidation of the sector, as he hunts for new opportunities after his ‘annus horribilis’.

The real estate investment trust (Reit) sector has suffered from persistently wide discounts, which has prevented the companies from raising money to take advantage of cheap buys in the market.

Phayre-Mudge, who heads up the £1bn Columbia Threadneedle’s fund-of-funds portfolio, has called on UK trusts to follow European and US companies, which are raising money even when their shares trade below the net asset value (NAV).

In Europe the manager recently ploughed £15m into Swedish property stock Sagax as part of a capital raise.

‘It raised at a discount to market and now the balance sheet is in great shape and it can make accretive acquisitions,’ he said.

Shares in the company rose from 212 Swedish krona (£16.13) per share to 238 krona per share, following the fundraise. 

‘One of the biggest problems in the listed property market is that [funds] want to raise at a premium to NAV,’ he commented. ‘They say raising at a discount is dilutive but in the US they ignore the NAV and work on the principle of whether the deal is earnings accretive, and if it is they will take the money.’

UK Reits, despite the discounts, have strong balance sheets when compared to private equity groups, as their loan-to-values are around 30% versus 50% or 60% in private equity.

Consolidation calls

The Reit sector is undergoing a period of rapid consolidation and Phayre-Mudge believes plenty more is needed.

He said any Reit with a market cap of less than £500m is ‘too small’ and ‘all of those should be amalgamated’, having backed the takeover of Ediston Property (EPIC ) – of which he was the largest shareholder – by US group Realty Income.

Although Phayre-Mudge said it was disappointing that EPIC was not merged with a peer and the assets were taken off the listed market, it was still a step in the right direction.

M&A was accretive for the company and its shareholders as ‘you generate fantastic efficiencies’ by cutting staff costs, he commented, adding that when LondonMetric Property (LMP) acquired stablemate CT Property (CTPT) this summer the new owner ‘did not take one member of staff’.

‘A small number of bodies can run a lot of real estate,’ he said. ‘Consolidation is earnings accretive.’

He forecast that the failed merger between UK Commercial Property (UKCM ) and Picton Property Income (PCTN ) – which was nixed by the by the former’s largest shareholder Phoenix Life – would have added ‘10% to earnings’.

‘There will be more M&A but it will take time,’ he said. ‘There are obstacles in the way.’

One of these obstacle is ‘protectionism’ of jobs, as M&A results in chair and director seats being reduced, although he said the board of a trust should ignore a takeover approach ‘at their peril’ in the current climate.

Performance

TR Property suffered an ‘annus horribilis’ in the year to the end of March, when the NAV slumped 35%, with the shares down 36%, and the MSCI All Property benchmark sliding 34%.

Phayre-Mudge (pictured) blamed his recent poor performance on hopes of peak rates being repeatedly dashed by central banks. However, he is confident this time the call is right and interest rates have plateaued.

‘In the last four weeks the US Federal Reserve has come out and said we are pausing and we think we are at the peak and now the market is pricing in up to four cuts next year,’ he said.

‘In the UK, we think rates are now a tabletop mountain rather than the Matterhorn.’

This rates optimism has helped lift the trust’s NAV 12% between 31 March and 24 November, and the shares are up 14.5%.

‘Even if rates remain at elevated levels we can still make money out of real estate,’ he said, noting that he has ramped up gearing to 14% - near his maximum level of 20% - in a show of optimism.

‘There comes a point where the market is trading at a collective 40% discount to the last published NAV and…the forward-looking risk profile is asymmetric. Yes, [Reit share prices] could fall further but there is still a lot in the price.’