reits value orbis

Don't know whether this article In June has already been posted.Still plenty of value in the Australian reit sector.

PHYSICIST turned fund manager Simon Marais does not have a passion for listed property trusts, but he has a nose for value.

In the past 18 months he has followed a scent to the debilitated sector, amassing stocks spurned by institutional investors.

Of about $900 million under the management of Orbis Investment Management (Australia), roughly a quarter of the money has found its way into Australian real estate investment trusts.

Orbis now sits at the top of the register of nine trusts, once part of the bedrock of the sector.

In total, Orbis has invested in 15 of the 26 trusts listed on the ASX/S&P 300 A-REITs index.

The rally has delivered solid gains to Dr Marais, who set up Orbis Australia in a 50:50 joint venture with the South African-based Orbis Investment Management group three years ago.

Orbis had $US15 billion under management at December 31 in South Africa and a similar amount in overseas operations. "We do not invest in Westfield or Dexus. We would not get much out of these large trusts as we would from beaten-up companies," Dr Marais said..

The "beaten-up" trusts, which include the ING stable, Macquarie CountryWide and GPT, have returned handsomely in the recent rally.

"Our investment has doubled, tripled and quadrupled in recent weeks," he said.

The ING Industrial Trust traded down to 1.6c a piece in March, but closed at 30c yesterday.

Similarly, Reckson New York Property Trust, which owns US office buildings valued at $230m at December 31 traded as low as 4c and has recovered to 10.5c.

Centro Retail Trust owns shopping centres in the US and Australia valued at almost $10bn at the end of 2008. Its share price has risen from 1.6c in the trough to 11c.

Orbis is the largest shareholder in these trusts. At these levels, analysts said, the market has priced some of them, such as Valad, for bankruptcy.

"Let's say three of the 15 trusts go broke. We still have 12 trusts which could triple in value," Dr Marais said. Despite the high debt in these trusts, their net tangible asset values were considerably more than the market had given them credit for.

Trusts such as Macquarie CountryWide and Macquarie Office Trust, had net tangible asset values of $1.48 and 63c respectively at December 31, 2008.

"Macquarie CountryWide used to trade around $2 a share and fell to 20c," Dr Marais said. "It may take five years before it gets back to $1 from its current level. It continues to pay distributions. This year it will pay 8c and earn around 12c a unit."

Goodman Group is another that attracts interest. "When I look at a company like Goodman, I see a company worth more than 20c a unit. It is worth the risk even though I do not like all the things its management is doing."

Orbis is the second-largest investor in diversified property group Australand, after its Singapore-based parent CapitaLand. "I would be worried if they started doing deals in favour of its Singapore parent to the disadvantage of minority shareholders."

Dr Marais is not necessarily always a bottom fisher: "Our first A-REIT investment was in ALE Property Group."

ALE is by no means a cheap trust. In the past three months, its average price was $2.10 a share.

"We like it because it owns pubs leased to Woolworths on triple net lease structure over 20 years and more." The tenants look after outgoings and maintenance on the pubs.

Orbis has about 9.9 million shares in ALE, ranking behind Woolworths as the trust's second-biggest shareholder.

"The current sentiment is bad against the sector because people quickly forgot the good times. It was not so long ago when BHP Billiton was considered a dreadful stock because of its problems in South America. Now it is regarded as a phenomenal company. The reality is probably somewhere in between." Dr Marais noted the Australian property sector had been more severely affected by the crisis than other markets because of high gearing and complex financial structures.

"This concept of loan to value ratio (LVR) is not used in other markets. What is important to banks the world over is the capacity to repay loans. Most Australian trusts have income covering their interest repayments many times over."

Orbis participated in GPT's rights issue, but philosophically he is against capital raising, especially now, when interest rates are down to 3 per cent.

Raisings were good for management in refreshing balance sheets and for investment banks, which receive big fees for service, but not for unitholders. Having recapitalised, the biggest risks in listed property have receded, and Dr Marais expects banks to lend to the property sector again.

"It is more risky lending to first home buyers, which is what they are doing now."