Update: TR Property (TRY) fund manager Marcus Phayre-Mudge has demanded that Unite (UTG) chief executive Joe Lister be held to account for its “disastrous” acquisition of Empiric Student Property.

Phayre-Mudge, head of property investment at Columbia Threadneedle subsidiary Thames River Capital, accused Lister and Unite’s management team of “hubris” in pursuing the £723m cash and shares purchase when student occupancy levels were falling.

“In more than 25 years of fund management, I have never seen such a disastrous corporate acquisition resulting in such an abrupt collapse in investor confidence,” said Phayre-Mudge who slashed TRY’s 4.6% holding in Unite to 0.5% as its share price slumped 44%.

“Although both management and the board were complicit in continuing with the acquisition whilst simultaneously reporting a profit warning (on the dramatic slowdown in the letting cycle) they should not hide behind ‘joint enterprise’,” the fund manager said in TRY’s annual results.

“The board must hold management hubris to account. They are not joined at the hip,” adding that chair Richard Huntingford and the other directors “owe a duty of care to shareholders and there must be accountability. Our small current holding reflects a meek hope that good governance will prevail.”

Picton hope

Fortunately, for TRY shareholders, the investment trust had better experience with other mergers and acquisitions as the real estate continued to consolidate. The best of these, the proposed £403m joint takeover of Picton Property Income (PCTN) by LondonMetric (LMP) and Schroder Real Estate (SREI) is one he encouraged as a shareholder in all three companies.

Phayre-Mudge told QuotedData was hopeful the bid, pitched at a 9% discount to the 31 December net asset value, would be finalised. He said he was happy to accept more “high quality paper” or shares in LMP, and also SREI, which would get an earnings boost from the fee holiday fund manager Schroders had offered on the assets transferred from Picton.

Middle East mayhem

Another frustration for the fund manager was the impact of the Iran war which marred the investment trust’s results and clouded the otherwise solid prospects for the real estate sector.

The £969m closed-end fund had enjoyed good momentum after a strong first half and in the 11 months to the end of February generated an investment return of 26.5%, ahead of its index benchmark’s 24.6%.

However, the US-led assault on Iran, changed all that with NAV slumping 15.6% in March as real estate firms tumbled on the expectation of a spike in interest rates as a surge in oil prices pushed up inflation expectations.

As a result TR Property’s underlying return was cut to 6.7% in line with the benchmark, which the company said was “disappointing” although it masked fundamental positives for rental growth due to constrained supply renewed tenant demand.

While finance costs had risen, lenders were competing to support good real estate firms with the result that loan margins were tight, said Phayre-Mudge.

“The recurring frustration is that share prices have once again been blown around by macroeconomic weather, while the property fundamentals underneath have continued to improve. Across most property sub-sectors, the simple equation remains supportive: there is too little new development, too little good-quality space, and a growing willingness from occupiers to pay for the assets that work for their businesses,” said Phayre-Mudge.

There was better news on earnings with income from investments up 21.8% at 15.81p per share enabling the board to recommend a final dividend of 10.35p per share, bringing the full-year total to 16.10p per share, a 1.3% increase with a reduced contribution from capital reserves.

 Our view

Matthew Read, senior analyst at QuotedData, said: “TR Property’s results highlight that listed real estate is a cyclical, rate-sensitive asset class, but also that the underlying fundamentals are not as gloomy as share prices often suggest. TRY enjoyed a much stronger first 11 months, before March’s market dislocation hit leveraged, long-duration assets hard. However, the earnings picture is improving – up 22% –  aided by higher dividends from underlying holdings and contributions from the direct property portfolio, which is helpful in a sector where income has been under pressure from higher finance costs.

“Occupier demand remains resilient, supply is constrained in many markets and debt remains available for well-capitalised property companies. At the same time, geopolitics, inflation and bond yields continue to dominate short-term sentiment. This is exactly the sort of environment in which balance sheet strength, governance and asset quality matter. The sector’s wide discounts to NAV remain frustrating, but they are also part of the opportunity

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