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Third Avenue Real Estate Value Fund

On May 20, we spoke with Sean McTernan, Managing Director of Marketing at Third Avenue about their Real Estate Value Fund (symbol is TVRVX), a global real estate fund, started in 1998 by Michael Winer.  Today the fund is managed by a team of five portfolio managers (including Winer) with $2.5 billion in assets.

 

Unlike most real estate funds, Third Avenue does not solely invest in real estate investment trusts (REITs) but also invests in real estate operating companies (REOC).  The fund focuses on total return; not just current income.  Currently they prefer REOCs because they can self-finance and are more tax efficient than REITs. 

 

The fund looks for companies that are well capitalized, have strong management teams, and have a long track record of wealth creation that are trading at discounts to their assets. They invest in a variety of homebuilders, land developers, REITs, real estate operating companies, timber companies, and real estate related companies. And at times, the fund has invested in debt or equities of distressed real estate companies that are undergoing reorganizations. The firm favors long holding periods and most investments last between three to seven years or about five years on average.

 

At the time of our call, approximately 57% of the fund’s assets were in commercial real estate, another 25% was in residential real estate and related industries and about 18% was in cash. While the fund’s average cash holding is typically in the single digits, the firm tends to change their amount of cash frequently and will often have large percentages of cash because they never feel obligated to be fully invested.

 

We spoke about Rayonier, a recent addition to the portfolio. The managers felt that it was a well-managed timber products company with a strong, stable balance sheet that became attractively priced when it traded down on weakness in its pulp business. They feel the company is a play on residential improvement (a major current theme of the fund). Subsequently, the company has announced a restructuring and will be split into two stocks.

 

We discussed an example of Third Avenue’s approach to special situations.  In 2007 CALPERS purchased Newhall Land Development, located in southern California. The company went bankrupt one year later.  Third Avenue bought senior debt which was converted to equity in the reorganization and had Michael Winer named to the Board.  The company has left bankruptcy with minimal debt and over 27,000 home sites in southern California, about 30 miles north of Los Angeles.  Newhall will begin selling lots this year and Third Avenue expects these sales will highlight Newhall’s intrinsic value.

 

As discussed above, the fund does not limit itself to investing only in REITS and it does not invest only in the US.  Currently 40% of its assets are invested in the United States, international investments rose from 5% in 2004 to almost 60% today. While the portfolio managers will look globally for value, they do limits investments to countries with acceptable political and legal safeguards for investors. For example, the firm does not invest in mainland China but is invested in Hong Kong because they believe them to be much different markets with different views on investor rights.

 

At Harvest, we think real estate is a major asset class, along with stocks and bonds, and should be represented in diversified portfolios.  We also think that attractive real estate values will not appear in just one country or one type of real estate corporate structure which is why we find this fund attractive.  Being able to look for value all over the world and in a variety of real estate related businesses give the fund’s investors an exceptional way to participate in this broad and deep asset class.

 

Harvest Financial Partners had not invested any clients’ assets with this fund at the time of the posting. A Harvest principal does hold a position in the fund. Clients of Harvest Financial Partners and its principals do own Rayonier at the time of this post.

 

Assistance on this post was provided by Jesse Castellana.