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Rupert Hargreaves
Rupert Hargreaves
Articles (1456)  | Author's Website |

TCI Fund Buys Commercial Property on Weakness

One fund is betting the sector's sell-off isn't as bad as it seems

One of the sectors that has suffered the most in the coronavirus pandemic is commercial real estate. Bank reports suggest that tens of billions of dollars of mortgage-backed securities in the commercial sector have suffered repayment issues. Further, the share prices of many commercial real estate investment trusts have collapsed in value.

Investors who have bet against the sector have made significant profits. Carl Icahn (Trades, Portfolio) announced publicly that he was betting against malls and physical retail towards the end of last year. Since then, he has reportedly earned $1.3 billion betting against the mall-heavy CMBX 6 index.

However, opportunities emerge in times of crisis. It appears that at least one hedge fund has been making the most of the decline in investor sentiment towards commercial real estate assets.

TCI buys property stocks

Chris Hohn's TCI Fund Management is one of the world's best performing hedge funds.
The $28 billion hedge fund has compounded investors' capital at about 18% per year, net of fees, since inception at the start of 2004. According to research conducted by The Financial Times, TCI's flagship Master Fund has produced investment gains of $17 billion since the beginning of 2010.

The fund has achieved this performance by taking large bets on what it believes to be significantly undervalued businesses. For example, the largest holdings in the portfolio, which together account for around 50% of assets under management, were Charter Communications (NASDAQ:CHTR), Alphabet (NASDAQ:GOOG) and Canadian Pacific Railway (NYSE:CP).

One of the reasons behind TCI's performance seems to be its ability to invest for the long term. It has owned its stake in Charter since the first quarter of 2016. Back then, the holding made up 36% of assets under management and traded at an average share price of $228. Over the past five years, the stock has yielded a compound annual average return of just under 26%, nearly doubling the market.

Based on the hedge fund's track record, I keep a close eye on its new investments as reported in quarterly 13F filings. This year, it has been using market weakness in the commercial property sector to build substantial positions into property-focused investment firms.

In the second quarter of the year, the hedge fund initiated positions in Boston Properties (NYSE:BXP) and Vornado Realty Trust (NYSE:VNO). It continued to buy into these positions in the third quarter. According to TCI's third-quarter 13F, the firm boosted its position in Boston Properties by 240% to just over five million shares, giving it a 1.5% portfolio weight. Meanwhile, the position in Vornado was hiked by 140% to just under ten million shares, giving it a 1.2% portfolio weight. Together, the two holdings made up just under $800 million of TCI's assets under management at the end of the quarter.

Boston Properties has seen its stock price drop from over $146 at the beginning of the pandemic to a low of nearly $70 at the end of October. Vornado Realty's stock has fallen from $70 to a low of $30. These declines suggest that the market believes these firms are worth 50% less than they were at the beginning of the year. While it is true that the pandemic has resulted in an increase in commercial property defaults and lower rents, I do not think the long-term decline in values has come close to 50%.

To put it another way, it would appear these firms' fundamentals are more robust than the market is suggesting. This could be why TCI has built a position over the past few months. The fund may believe these stocks look undervalued compared to their underlying fundamental value.

Disclosure: The author owns no share mentioned.

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About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

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