Investing is a game of probabilities, not absolutes. The most important job of an investor is to find mispriced bets to put on the conveyor belt. But you almost never know when, or indeed if, those bets will pay off until they do. Or don’t. Fortunately, the Forager International Shares Fund’s investment in German commercial property owner Deutsche Office has gone largely to plan.
At the time, the group was still working through its financial crisis hangover. It owned a mishmash of good and problematic properties with high vacancy rates and was going through a complex merger with a larger, unlisted property group. It did not pay dividends either. Conservative German yield investors said ‘Nein Danke’, leaving value investors the opportunity to buy the stock at more than a 30% discount to the net asset value (NAV) of the properties it owned.
Those willing to untangle some complexity could see a path through all of these issues to a decent profit. The merger with German Acorn in early 2014 brought in a talented group of property managers who improved occupancy, cut costs and sold problematic properties at decent prices. The company refinanced expensive debt, lowering its interest costs.
Dividends started to flow, and German yield investors flocked back, willingly or forcefully compelled by Mario Draghi’s quantitative easing program. Eventually the discount to NAV evaporated, and the stock began to trade at a small premium. Over the European summer, fellow commercial property owner Alstria Office (DB:AOX) announced an all-stock merger proposal and got the green light from Deutsche Office’s controlling shareholder, Oaktree.
Over the past five months, the International Fund sold down its stake and had completely exited by the end of the most recent quarter. Most of this selling was done at very attractive prices after the Alstria bid was announced but before the late August market downturn. The total return on our investment eclipsed 50%, better again in Australian dollar terms. It is a great outcome from what ultimately proved a low-risk investment.
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