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Primer cuatrimestre portfolio .pdf



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Third Avenue Real Estate Value Fund

F I RST Q UA RT E R P O RT FO LIO MANAGER COMMENTARY
JAnuAry 31, 2014

Third Avenue Real Estate Value Fund
(Unaudited)
Dear Fellow Shareholders:

Number of Shares

Increased Positions

We are pleased to provide you with the Third Avenue real
Estate Value Fund’s (the “Fund”) report for the quarter
ended January 31, 2014.

1,300,000 shares

Millennium & Copthorne Hotels
plc Common Stock (“Millennium
Common”)

410,443 shares

Post Properties, Inc. Common
Stock (“Post Common”)

The following summarizes the Fund’s investment activity1
during the quarter:

2,488,035 shares

Songbird Estates plc Common
Stock (“Songbird Common”)

Number of Shares

New Positions

1,100,000 shares

3,500,000 shares

Inmobiliaria Colonial SA.
Common Stock (“Colonial
Common”)

Westfield Group Common Stock
(“Westfield Common”)
Reduced Positions

9,834,606 shares

2,811,072 shares

Parkway Properties, Inc. Common
Stock (“Parkway Common”)

525,000 shares

rayonier, Inc. Common Stock
(“rayonier Common”)

Taylor Wimpey plc Common
Stock (“Taylor Wimpey
Common”)
Positions Eliminated

2,811,072 shares

Parkway Properties, Inc. Common
Stock (“Parkway Common”)

7,354,979 shares

Thomas Properties Group, Inc.
Common Stock (“Thomas
Common”)

QUARTERLY ACTIVITY

303,238 shares

Starwood Waypoint residential
Trust Common Stock (“Starwood
Common”)
Increased Positions

2,050,000 shares

City Developments Ltd. Common
Stock (“City Dev Common”)

1,048,244 shares

Commonwealth rEIT Common
Stock (“Commonwealth
Common”)

PORTFOLIO UPDATE

During the quarter, the Fund actively recycled capital by
eliminating two common stock positions (Thomas
Properties and Parkway Properties), further reducing a
previous top-10 holding (Taylor Wimpey), and

Portfolio holdings are subject to change without notice. The following is a list of Third Avenue real Estate Value Fund’s 10
largest issuers, and the percentage of the total net assets each represented, as of January 31, 2014: Forest City Enterprises,
Inc., 4.77%; newhall Holding Co. LLC, Class A, 4.53%; Weyerhaeuser Co., 4.14%; Cheung Kong Holdings, Ltd., 3.81%; Lowe’s
Cos., Inc., 3.49%; Songbird Estates PLC, 3.44%; First Industrial realty Trust, Inc., 3.23%; Hammerson PLC, 3.08%; Westfield
Group, 2.94%; and Wereldhave nV, 2.73%.
* Please note that a footnote contained on page 16 of the Third Avenue Funds Fourth Quarter Shareholder Letters contained
errors. The footnote should have read as follows, “1 Third Avenue real Estate Value Fund Institutional Class ranked number
one out of the 20 funds with 15-year track records included in Morningstar’s Global real Estate category, based on 15-year
average annual returns, as of September 30, 2013. Please note that TArEX has not been the number one ranked fund for all
time periods and might not be ranked number one in the future. Different funds take different levels of risk. you should read
the Fund’s prospectus for a detailed description of risk prior to investing. For the one, three, five and ten-year periods, the
Fund ranked 15 out of 201 in the category, 2 out of 161, 8 out of 136 and 12 out of 27, respectively, Source: Morningstar.
Please note Morningstar categories are subject to change over time, based on portfolio composition. The Fund was added
to the Global real Estate Category in September 2008 and has been in several different categories throughout the past 15
years.” We sincerely apologize for our error and any inconvenience caused.
1 Investment activity excludes currency hedges.

17

Third Avenue Real Estate Value Fund (continued)
(Unaudited)
of the price-to-value discrepancy that currently exists in
the Fund’s holdings. Therefore, we thought it would be
worthwhile to provide our shareholders with a review of
the new positions and the Fund’s top five holdings which
collectively account for about 25% of the Fund’s assets.
Only two of the positions outlined below have been top
holdings in recent years. While the holdings in the
portfolio have evolved, the underlying theme for Fund’s
core holdings remains the same, as each security
currently trades at a discount to our conservative
estimate of net asset value and represents an ownership
interest in a real estate company that is well-financed, run
by a competent control group, and is positioned to
increase underlying value by 10%, or more, per year after
adding back dividends.

reallocating the proceeds to three new common stocks
(rayonier, Colonial, and Starwood Waypoint). The new
positions are each unique real estate securities that
ended up on our radar as a result of our differentiated
screening process. As noted in previous letters, we have
enhanced our process over recent years. In addition to
tracking our existing holdings, we closely follow 30 to 40
securities (our “T-2” portfolio) that we would like to
own – just at lower prices. In addition, we run proprietary
quantitative and qualitative screens on the rest of our
real estate universe to generate additional ideas. The
Fund’s long-term holdings, or strategic positions, tend to
originate from our “T-2” list, whereas the Fund’s shorterterm, or special situation investments, tend to be a result
of our weekly screens. This quarter, all sources yielded
actionable investment ideas. rayonier Common was on
our “T-2” list when it became available at a more suitable
price; Colonial Common was picked up on a quantitative
screen after its stock price declined sharply following an
announcement that it would undertake a dilutive capital
raise; and Starwood Common was sourced from a
qualitative screen after Starwood Property Trust
announced that it would be spinning off the portfolio into
a separately traded company. Having the infrastructure
in place to capture potential investment opportunities
and the ability to underwrite investments in a judicious
manner is more than half the battle.

NEW POSITIONS:

Inmobiliaria Colonial (“Colonial”) is a Spanish real estate
operating company with three primary assets: (i) a whollyowned office portfolio in Spain, (ii) a 53% stake in Societe
Fonciere Lyonnaise – a separately listed French rEIT that
owns an office portfolio in Paris, and (iii) a homebuilding
business in Spain. We have followed the company for
several years but never invested in Colonial Common
because, notwithstanding its high-quality office portfolio
(Paris, Madrid and Barcelona), the company was saddled
with too much debt resulting from a leveraged buyout in
2006. The company recently announced that it planned
to raise £1.0 billion of capital through a highly-dilutive
rights offering to existing shareholders, use the proceeds
to pay down its credit facility and then re-focus on
stabilizing and enhancing its office portfolio. After our
initial assessment of the terms on the offering, we elected
to conduct more extensive due diligence which included
meetings with management, property tours in Madrid and
Barcelona, as well as meetings with a number of other
market participants. Following those efforts, the Fund
initiated a position in Colonial Common with plans to fully
participate in its pro-rata share of the rights offering. Our
initial stake in Colonial Common is small, but upon
completing our subscription in the 9-for-1 rights offering,

The Fund also increased its investment in six existing
holdings including the common stock of Songbird Estates,
Westfield Group, Millennium & Copthorne, Post
Properties, City Developments, and Commonwealth rEIT
(uS). After taking into account this activity, the Fund
ended the quarter with the following allocations: north
America (44%), Europe (20%), Asia ex-Japan (14%),
Australia (7%), and Cash (15%). The Fund’s returns will
undoubtedly be impacted by the performance of real
estate securities in these regions in the short-term.
However, as bottom-up fundamental investors it is our
belief that the Fund’s long-term returns will ultimately be
determined by the performance of the underlying
enterprises in which we are invested and the elimination

18

Third Avenue Real Estate Value Fund (continued)
(Unaudited)
establish its own capital structure and growth plans, and
attract investors dedicated to each business as they have
very little overlap today. The market responded positively
to the announcement. unfortunately, the Fund had only
established a 1% position in rayonier Common prior to the
announcement. We will continue to monitor the existing
investment and reassess the opportunity to add to the
position as the company splits into two separate entities.

the total investment will represent a meaningful position
in the Fund and at a price substantially below our estimate
of net asset value. Post rights offering, the company will
be in a very sound financial condition and well-positioned
to invest capital to enhance the value of its properties. We
believe the company’s new management team is
competent and should be able to materially increase net
asset value considering that nearly 20% of its Spanish
office portfolio is vacant and the company has been capital
starved over the past five to six years. In addition, the
company has a substantial tax loss carry forward which
could shield taxes for up to 18 years – a hidden asset that
could ultimately prove quite valuable.

We initiated a small position in Starwood Waypoint
Residential Trust (“SWAy”), a u.S. rEIT focused on owning
and operating single family rentals. SWAy was recently
spun off from Starwood Property Trust, a mortgage rEIT.
SWAy currently owns a portfolio of approximately 5,049
homes and 1,736 non-performing mortgage loans
(“nPLs”), concentrated in markets with strong housing
recovery potential such as Florida (approximately 40% of
the portfolio). We have monitored the single family rental
industry since its inception and concluded that a successful
strategy requires stand-out property management and
proprietary sourcing. Starwood acquired Waypoint, the
oldest single family management platform in 2013.
Waypoint, founded in 2009, is arguably one of the best
operators in the industry – its legacy managed portfolios
have enjoyed operational metrics comparable with the
best multi-family operators (approximately 95% occupancy
with approximately 65% nOI margin). From the sourcing
perspective, what separates Starwood Waypoint from
others is its nPL strategy that allows it to acquire properties
at more attractive values through its joint venture with
PrimeStar. The joint venture analyzes nPL pools,
determines bid values and the best workout strategy for
each nPL. Taking nPLs through foreclosure allows SWAy to
acquire single family houses at a significant discount to
what competitors must pay when acquiring portfolios of
already-foreclosed houses. SWAy currently has a net-cash
position with no debt on its balance sheet. Starwood
Common trades at a discount to replacement cost of its
existing homes and the market value of its non-performing
mortgage loans. We believe SWAy will be able to continue
to grow nAV at 10% a year via continued home price

Rayonier is a real estate investment trust (“rEIT”) based
in the united States that has been on our watch list for
several years as the company owns high-quality timberland
assets, most of which are located in the Southeast, some
well-located land on the I-95 corridor in Florida and
Georgia that seems likely to benefit from higher-and-better
use potential over time, as well as a cellulose fibers
business that has become a market leader in specialty
fibers and a “cash-cow” for the company. The company has
also historically been conservatively financed and wellmanaged. until recently, rayonier Common traded at a
premium to our estimate of net asset value as market
participants have typically “paid up” to gain exposure to
the company’s rapidly growing fibers business. However,
in October 2013, the company announced a slew of
warnings related to this business unit including cost
overruns at a large expansion project and an outlook for a
weak pricing environment given additional supply in the
global market. After the announcement, the stock price fell
by more than 25%, creating an opportunity for the Fund
to establish a position in rayonier Common at a discount
to our estimate of the private market value of its three
businesses. Shortly thereafter, rayonier announced it will
be splitting into two companies by spinning off its
performance fibers business into a separately traded entity.
The purpose of the transaction is to surface the value in
the underlying businesses, allow each company to

19

Third Avenue Real Estate Value Fund (continued)
(Unaudited)
attractiveness of newhall ranch and improvement in the
Los Angeles residential markets has not gone unnoticed.
The trading price for newhall Common has increased by
nearly 260% over the past year, implying a $1.2 billion
enterprise value for the company. This compares to an
enterprise value of approximately $450 million when it
emerged from bankruptcy in 2009 and a pre-bankruptcy
(2007) appraised value $2.6 billion. We do not expect a
$2.6 billion valuation anytime soon, but given the scarcity
value of newhall’s home sites and the supply-demand
imbalance that is rapidly building in the Southern
California residential market, today’s $1.2 billion valuation
still seems conservative.

appreciation as well as future acquisitions and workout of
nPLs. We believe SWAy may also offer a unique hedge
against a stall in the u.S. housing recovery. Higher default
rates would result in more nPLs and foreclosures resulting
in higher demand for rental houses. Similar dynamics
created higher cash flows and valuations for apartment
owners since the financial crisis.
TOP FIVE HOLDINGS:
Newhall Land & Development (5% of Net Assets)

newhall Land is a u.S. based real estate operating
company that owns one of the most prime land positions
in north America. The company’s key asset is its land
holdings in Los Angeles County, where it owns the
newhall ranch master planned community with
approximately 22,000 new homes planned just 30 miles
north of downtown Los Angeles. The company also owns
land that could support over 12 million square feet of
commercial development in newhall ranch and 16,000
acres of agricultural land in Ventura County. The Fund’s
equity position in newhall originated in 2008 by
purchasing the predecessor company’s senior secured
bank debt ahead of the company filing Chapter 11
bankruptcy. Through the Chapter 11 reorganization, the
Fund’s debt position was converted into equity and the
reorganized company emerged in 2009 with no debt and
a first-rate management team. Since 2009, newhall has
sold off the vast majority of its non-core assets; it still has
no debt and currently has over $200 million of cash on
its balance sheet. Los Angeles residential markets have
improved dramatically since new building was largely
curtailed, excess inventory has been absorbed and
demand has lead to higher prices for the limited amount
of new homes available. residential prices in Los Angeles
increased by approximately 22% during 2013. newhall
ranch is not a new frontier. It is located on the West side
of Interstate 5, adjacent to the highly-acclaimed and
successful Valencia master-planned community (which
was also previously developed by newhall ranch).
newhall should be in a position to begin delivering highdemand buildable lots to homebuilders in 2016. The

Forest City Enterprises, Inc. (5% of Net Assets)

Forest City is a uS based real estate company that owns
a high quality portfolio of commercial properties
concentrated in some of the best markets in north
America including new york City, Boston, Washington,
D.C., and San Francisco. In addition, the company controls
one of the most strategic development pipelines in the
country with major mixed-use projects in Brooklyn
(Atlantic yards), Washington, D.C. (yards), and Denver
(Stapleton). Forest City has been a long-time holding in
the Fund. Historically the company created a great deal
of shareholder value by retaining the vast majority of its
cash flow and reinvesting in development and urban
regeneration projects at a profit. However, the company
entered the financial crisis with an excessive amount of
development exposure and debt levels that were
unsustainably high. Forest City has spent the past five
years focused on completing its development projects
and right-sizing its balance sheet. In our view, the
company has completed about 85-90% of the steps
necessary get the company back into a position of
strength. However, Forest City Common still trades at a
price as if it were in the early stages of a repositioning. In
fact, at current prices Forest City Common is trading at
more than a 20% discount to a conservative estimate of
liquidation value ($23-24 per share) and more than a 35%
discount to net asset value based upon public and private

20

Third Avenue Real Estate Value Fund (continued)
(Unaudited)
market comps ($30-31 per share). This discount seems
extreme and will likely dissipate as there is additional
visibility on items that have created some uncertainty
(i.e., stabilization of ridge Hill development project,
profitability of Barclays Center, long-term plans of its stake
in the Brooklyn nets, etc.) and the company possibly
implements some other shareholder friendly initiatives
(e.g., reinstating the dividend, repurchasing stock at
discounted prices, collapsing the dual-class share
structure, etc.). In addition, Forest City is one of the few
real estate companies positioned to capitalize on demand
for new commercial building activity with entitlements in
some of the most supply constrained markets in the
united States. As market conditions allow Forest City to
reactivate these projects on a profitable basis, the
company should once again generate industry leading
returns through the development and urban
regeneration process, albeit at a more measured pace.

fundamentals in the uS residential markets have
improved, the company has sold some non-core assets
and recently announced its intention to divest its
homebuilding business. The stock price has responded
favorably to recent events. However, we believe
Weyerhaeuser is still far from realizing its full potential.
The process of unlocking value seems to have recently
accelerated. The company recently appointed a new CEO
(Doyle Simons) who has a track record of cutting costs,
divesting businesses to realize value, and returning capital
to shareholders. It seems reasonable to expect over the
next few years that Weyerhaeuser will (i) complete the
divestiture of its homebuilding business, (ii) repurchase
shares or pay a special dividend with the proceeds, (iii)
relentlessly cut costs in the remaining businesses,
particularly in Wood Products so that the company can
achieve full levels of profitability when the uS residential
markets return to more normalized levels of housing
starts (1.5-1.6 million units annually), and (iv) ultimately
divest its non-timber businesses so that Weyerhaeuser is
a more focused company with an unmatched portfolio of
timber assets. Should that chain of events unfold, the
value of the various pieces should easily exceed $40 per
share. Our estimates of value may prove conservative if
other factors play out in the company’s favor, like the end
of the Mountain Pine Beetle epidemic in British Columbia
leading to higher prices for logs in the Pacific northwest
(where the company is the dominant log provider) and
more converting activity in the Southeastern uS (where
Weyerhaeuser has a great deal of excess capacity within
Wood Products).

Weyerhaeuser Co. (4% of Net Assets)

Weyerhaeuser is a u.S.-based rEIT that owns one of the
most valuable and productive timberland portfolios
globally with 7 million acres of timberlands including 2.6
million acres in the Pacific northwest that are particularly
well suited for growing Douglas fir and exporting to Asia
to capitalize on premium pricing in those markets. In
addition to its timberland business, Weyerhaeuser is
involved with wood products (i.e., lumber, OSB, and
engineered wood products), homebuilding, and cellulose
fibers. The Fund originally established a position in
Weyerhaeuser Common in 2010. It was our thesis then
that (i) the Fund was buying into an incredibly wellfinanced company that owned some irreplaceable assets
at a material discount to the private market value of the
various businesses and (ii) that the discount would close
as conditions within the uS residential markets (which
impact three of the four businesses) improved from
depressed levels and the company undertook some
additional resource conversion activities (e.g, sales, spinoffs, mergers, etc.). Since making the investment,

Cheung kong (4% of Net Assets)

Cheung Kong Holdings is a Hong Kong based property
owner and developer of real estate in Hong Kong and
Mainland China and is the controlling shareholder
(49.97%) of Hutchison Whampoa, a Hong Kong listed
conglomerate. The Fund established its position in
Cheung Kong during the course of 2011, taking advantage
of the sell-off in Hong Kong property shares. The

21

Third Avenue Real Estate Value Fund (continued)
(Unaudited)
buybacks and dividend growth given its fortress-like
company exhibits all of the qualities that we find
balance sheet and cash generation. If that is not enough,
attractive in an equity security: owner/operator model
Cheung Kong management has a history of well-timed
with a deep corporate bench that has a solid operating
resource conversions that could involve selling stabilized
and capital allocation track record, possesses extremely
assets outright or spinning off property into publicly listed
high quality assets, a strong financial position, and shares
vehicles to highlight and crystalize the latent value for
that trade at a significant discount to conservatively
investors.
estimated net asset value with long-long term nAV
growth potential. Since 2011, the Hong Kong and China
Songbird Estates (3% of Net Assets)
property market has been under a cloud of governmentled policy uncertainty which has dampened investor
Songbird Estates is a u.K.-based company that is the 70%
sentiment for most Hong Kong property shares. Despite
controlling shareholder of the Canary Wharf Group
the cloud of uncertainty, Cheung
(“Canary Wharf”). Canary Wharf
Kong’s operating results have
is a u.K. based real estate
“We believe it now makes
been respectable, with book
operating company that owns
value per share compounding at sense to look for securities that more than 7 million square feet
slightly more than 9% over the are not as widely held and that of class-A office and retail space
three year period. unfortunately,
on the Canary Wharf Estate in
are more likely to exhibit
the fundamental progress has not
East London. In addition to its
inefficient pricing. There are income producing portfolio,
been recognized by investors,
resulting in the shares trading at a
which is essentially fully let, the
certain pockets of the real
wider discount to book value
has entitlements for an
estate universe that are likely company
(20%) and an even larger discount
additional 11 million square feet
to our estimate of net asset value to prosper in the years ahead, of development on the Estate, an
despite a strengthening financial
adjacent Estate (Wood Wharf)
even in a rising rate
position
and
exceptional
and in Central London (Shell
environment, but it will take Centre redevelopment). The
performance at its largest asset,
Hutchison Whampoa Limited, that
patience and skill to identify Fund has owned Songbird
accounts for 60% of its gross asset
since 2009. At the time
those specific opportunities.” Common
value. This has led to the double
of the initial investment, the Fund
discount often applied to holding
purchased
shares
and
company structures reaching an extreme level. The “stub”
participated in a highly dilutive rights offering which
valuation of Cheung Kong is near a 65% discount to our
raised $1.4 billion of proceeds for the company in order
estimated net asset value, close to the historical high in
to repay debt. Similar to our thesis on Colonial, it was our
2003 during the SArS epidemic. It seems reasonable over
view that the Fund was establishing a position in the
the next few years that Cheung Kong’s discount could
common stock at a discount to net asset value and after
close as investors recognize the (i) stability of profits from
the capital raise the company would be well capitalized
its large launch schedule in their Hong Kong and China
and positioned to increase the underlying value of the
residential property portfolio focused on mid-scale price
enterprise. nearly five years later, the thesis largely
points, (ii) continued earnings and dividend growth from
remains the same; Songbird Common has increased by
Hutchison Whampoa, and (iii) potential for share
more than 40% since our initial investment, but is still at

22

Third Avenue Real Estate Value Fund (continued)
(Unaudited)
more than a 15% discount to its stated net assets per
share (£2.21 as of June 30, 2013). Furthermore, this value
seems somewhat understated since it places minimal
value on the company’s entitlements. In our view, these
entitlements will ultimately prove to be quite valuable as
demand for commercial and residential space at the
Canary Wharf Estate and surrounding area is poised to
increase considerably once the Crossrail project is
completed in 2018. This high speed rail line is currently
under construction and will meaningfully enhance the
ease of transport from East London to West London. For
instance, it will take less than 40 minutes to get from
Canary Wharf to Heathrow, less than 15 minutes to Bond
Street, and altogether is estimated to bring an additional
1.5 million people within a 45 minute commute of
London. This should not only accelerate the development
on the Estate but could also lead to the rents on existing
properties to converge with rents in the City, which are
more than 50% above rental rates on the Estate.

not as widely held and that are more likely to exhibit
inefficient pricing. There are certain pockets of the real
estate universe that are likely to prosper in the years
ahead, even in a rising rate environment, but it will take
patience and skill to identify those specific opportunities.
Some of those areas include (i) companies that have
strong ties to the u.S. residential markets which are in
the middle stages of a long-awaited recovery, (ii)
companies that have entitlements for new development
in highly desirable markets along with the balance
sheets and management teams necessary to provide
new commercial building as demand for new product
returns, (iii) smaller and mid-sized real estate businesses
that are viewed as strategic platforms and likely to be
acquired by larger competitors or private equity funds
as M&A activity continues to accelerate, and (iv) special
situation investments particularly in recently
recapitalized companies that now have the balance
sheets and management teams necessary to increase
corporate value. The vast majority of the holdings in the
Fund are exposed to one of these four areas, which
should drive improved fundamental performance in
2014, as well as in the years ahead.

OUTLOOk

As the Fund enters its sixteenth year, we continue to
believe that real estate is an essential allocation for any
long-term investor. Historically, property has been a
terrific place to park capital and protect it from inflation
over time. Further, should that capital be invested
alongside capable managers in high-barrier-to-entry
markets, low-double digit returns (10-12%) are
oftentimes achievable without having to take outsized
risks. real estate securities have had an incredible “run”
over the past five years, though much of that
performance is attributable to the large u.S. rEITs that
have been popular with income seeking investors. We
believe it now makes sense to look for securities that are

We thank you for your continued support and look
forward to writing to you next quarter.
Sincerely,
Third Avenue real Estate Value Fund Team
Michael Winer, Lead Portfolio Manager
Jason Wolf, Lead Portfolio Manager
ryan Dobratz

23


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