Third Avenue Management

Third Avenue Management

Last Update: 01-09-2017
Related: Martin Whitman

Number of Stocks: 111
Number of New Stocks: 2

Total Value: $2,182 Mil
Q/Q Turnover: 1%

Countries: USA
Details: Top Buys | Top Sales | Top Holdings  Embed:

Third Avenue Management Watch

  • Third Avenue Management Comments on Petroleum Geo-Services

    Petroleum Geo-Services ("PGS") (OSL:PGS) Throughout December and early January, PGS completed its refinancing activities as described in our previous letter. PGS conducted an equity raise primarily for the purpose of refinancing its 2018 bonds. The Fund was a holder of both PGS equity and its 2018 bonds. We were pleased to participate in improving PGS’ capital structure via the equity offering, which precipitated a meaningful price appreciation of both our equity and credit positions. PGS tendered for our 2018 bonds PGS on terms favorable to bondholders, and meanwhile the company’s equity responded very favorably to the improvement in the company’s capital structure and the elimination of its nearest debt maturity. Our investments in PGS securities have been important contributors to performance of late.

      


  • Third Avenue Management Comments on Lundin Mining

    Lundin Mining (“Lundin”) (TSX:LUN) In mid-November, Lundin announced that it had entered into an agreement to sell its holding in an entity called TF Holdings Ltd. TF is the entity through which Lundin and Freeport-McMoRan have for many years controlled a Central African copper mine called Tenke Fungurume. The Lundin transaction essentially is the sale of a 24% economic interest in the mine for the agreed price of CAD 1.14 billion. This transaction is expected to close during the first half of 2017 and would add considerable cash to what is already one of the mining industry’s best balance sheets. While Tenke Fungurume is an unusually high quality mine, its jurisdiction can at times be an unusually challenging place to do business. We view the transaction price as reasonable and look positively upon the prospective reduction of political risk embedded within Lundin. With the transaction proceeds Lundin would also bolster its position as one of the very few companies in a position to acquire mining assets at one of the rare times when some very decent assets may be available for sale.

      


  • Third Avenue Management Comments on Lundin Mining

    Lundin Mining (“Lundin”) (TSX:LUN) In mid-November, Lundin announced that it had entered into an agreement to sell its holding in an entity called TF Holdings Ltd. TF is the entity through which Lundin and Freeport-McMoRan have for many years controlled a Central African copper mine called Tenke Fungurume. The Lundin transaction essentially is the sale of a 24% economic interest in the mine for the agreed price of CAD 1.14 billion. This transaction is expected to close during the first half of 2017 and would add considerable cash to what is already one of the mining industry’s best balance sheets. While Tenke Fungurume is an unusually high quality mine, its jurisdiction can at times be an unusually challenging place to do business. We view the transaction price as reasonable and look positively upon the prospective reduction of political risk embedded within Lundin. With the transaction proceeds Lundin would also bolster its position as one of the very few companies in a position to acquire mining assets at one of the rare times when some very decent assets may be available for sale.


     

      


  • Third Avenue Management Comments on Global Logistic Properties

    Global Logistic Properties (“GLP”) (SGX:MC0) We have been satisfied owners of GLP for some time. From an execution standpoint, this logistics facility developer, owner and operator continues to do a fine job operationally. The company has judiciously grown its facilities network in China, Japan, Brazil and the U.S., both organically and through acquisition, at a pace appropriate for each respective geographic market while maintaining a conservative balance sheet. Meanwhile, the company has made great strides in growing its fund management platform, which has the benefit of improving overall returns through the incorporation of fee-paying third party capital. However, the stock had until recently languished at a low valuation presumably as a result of the broad perception that macroeconomic growth in China is slowing and that the growth of GLP’s network development will also slow in turn. Yet investors fixated on rapid growth of earnings fail to appreciate the value of the existing in-place network of facilities, a reasonable replacement cost analysis of those assets, the extreme difficulty in replicating the assets and the long-term secular drivers that are likely to make the assets increasingly critical and valuable over time. On the other hand, these concepts appear to be better appreciated by potential acquirers of GLP. In early November, it was widely rumored that a consortium of buyers had approached GLP with an interest in purchasing the company. One month later the company disclosed that it had opted to undertake a strategic review to identify means by which shareholder value could be enhanced. It was also disclosed that investment bankers had been hired for that purpose. We believe GLP’s assets and platform to be of exceptional quality and without rival in Asia. We suspect that GLP’s apparent willingness to entertain a transaction is likely to bring forth a number of potential buyers. In reaction to the above-mentioned rumors and press releases, shares of GLP appreciated by 24% in Singapore dollar terms during November and December.


     

      


  • Third Avenue Real Estate Value Fund 4th Quarter Commentary

    Dear Fellow Shareholders:


    We are pleased to provide you with the Third Avenue Real Estate Value Fund’s (the “Fund”) report for the quarter ended December 31, 2016. This quarter marks an abbreviated period as the Third Avenue Funds have elected to circulate our quarterly letters on a calendar year-end going forward (previously October 31) to more closely align with the reporting periods for a number of the Funds’ stakeholders. For the year ended December 31, 2016, the Fund returned +5.82% (net of fees)¹ versus +4.99% (before fees) for the Fund’s most relevant benchmark, the FTSE EPRA NAREIT Developed Index². While the Fund outperformed for the calendar year, Fund Management remains most focused on long-term performance where it has also exceeded the index, earning an +10.63% annualized return since its inception in 1998.

      


  • Third Avenue International Value Fund 4th Quarter Letter

    Dear Fellow Shareholders:

    With this investment letter, Third Avenue Management (Trades, Portfolio), including the Third Avenue International Value Fund, transitions to a calendar quarter shareholder letter schedule. We make this change in order to align more closely with interested financial intermediaries, many of whom have calendar quarter reporting requirements. It is our hope to better serve our fellow shareholders by making this transition. We have historically made these communications following the Funds’ fiscal quarters, the most recent of which concluded on October 31st. Therefore, this letter serves as an update for the two month “stub” period beginning November 1st and ending December 31st.  


  • Third Avenue Value Fund Buys 2 Stocks and Adds to 2 Positions in Q4

    Third Avenue Management (Trades, Portfolio), a private investment firm founded by legendary value manager Martin Whitman (Trades, Portfolio), ends its quarter on Oct. 31 and revealed the fourth-quarter trades of its Third Avenue Value Fund in its recent letter.

    The leader portfolio manager on the value fund is Chip Rewey. The firm’s philosophy focuses on fundamental, bottom-up research in a hunt for companies with strong capitalization, potential to compound value and shareholder-oriented management. They purchase when the companies trade at a discount to their net asset values.  


  • Third Avenue Focused Credit Fund Letter a Year After Starting Wind Down

    Dear Fellow Shareholders,


    As we wrote to you in our letter dated November 29, 2016, the Third Avenue Focused Credit Fund (the "Fund" or "FCF") recently paid its fourth liquidating distribution. Fund management has continued the orderly wind down of FCF and cumulative distributions now account for approximately 40% of the Fund's total assets since FCF announced its plan of liquidation on December 9, 2015.

      


  • Third Avenue Management Comments on Korn Ferry International

    Many of you may recognize the strong brand name of Korn Ferry International (NYSE:KFY), another purchase in the quarter, but you may not have noticed the business transformation the company has undertaken anchored by its December 2015 purchase of the Hay Group. Korn Ferry is best known for its executive recruiting. It is a top brand name in this highly fragmented industry, with a strong offering on the more resilient and niche C-suite space. Most of its job searches have annual compensation of $300,000 or more.


    With the acquisition of the Hay Group, Korn Ferry has leveraged this valuable network at the C-suite level and brought critical mass to its human resources advisory businesses. The goal is to engage more with its corporate clients beyond placing top level personnel and to provide a more stable revenue stream than a purely search-driven business model. When acquired, Hay Group earned an uninspiring 8% on its revenue, or $40 million in EBITDA. 11 months after the integration, the Hay Group has begun to deliver on its projected benefits and synergies. We estimate that Hay's EBITDA margin already improved from 8% to 12%, and should continue to grow to 15-16% over the next two years.

      


  • Third Avenue Management Comments on Comfort Systems USA

    Beyond a strong balance sheet, other key characteristics that we look for in our companies include a strong business model and a large addressable market to support long-term revenue and earnings compounding. Our addition of Comfort Systems USA (NYSE:FIX) is a good example of these factors. Comfort Systems offers design, installation, retrofit and service for HVAC and electrical systems for facilities such as office buildings, plants, retail centers, hospitals and universities. Comfort Systems is unique in that it focuses mostly in smaller cities where, relative to large urban settings, there is less competition for both projects and for skilled labor. The company works on approximately 4,000 jobs annually and most of the contracts are under $1 million. More than half of these are for renovations and repairs and are recurring in nature, rather than from new constructions.


    The outlook for revenue growth is solid, as the aging existing HVAC stock in the U.S. should provide a good organic growth rate of approximately 3 to 5% annually over many years. We particularly like the management team's skillset in acquiring smaller competitors to add geographic coverage and achieve operational synergies. Management buys small, local competitors that earn only 2 or 3% operating margins (the margins are low in this business because they include pass-through equipment costs) and pay only 5-6X EBITDA. After overlaying Comfort Systems' buying power and operational standards, margins of the acquired companies normally double to 4-6% after a year, effectively cutting the purchase price in half. We think that a combination of a solid core business, operational leverage and large acquisition opportunities will provide higher sales and higher margins for many years. Net of cash, the company has no debt. At our purchase price of just over $28, we see solid upside to our mid-$30's estimate of fair value NAV, with a solid outlook for book value growth and a 6.2% free cash flow yield.

      


  • Third Avenue Management Comments on Cubic Corp

    Cubic Corp (NYSE:CUB), another top holding for the Fund, is a small company with about $1.1 billion in market cap that has three main businesses: military communication equipment, military training (for example, they run the Top Gun flight school), and in our view the most interesting part is its transportation segment. The company's transportation segment is the world leader in design and management of public bus and subway systems, handling the fare systems for major cities such as London, New York City, Chicago, and Vancouver. Cubic is also leading technology efforts, such as smart phone payments and dynamic re-routing, to help keep us all on time for work.


    The company meets all of our requirements, with low (and declining) financial leverage, highly visible means to compound earnings and book value growth. And, at $43 per share, we think the stock is very under-valued, with upside to north of $60 within a couple of years.

      


  • Third Avenue Management Comments on Multi-Color Corporation

    Multi-Color Corporation (NASDAQ:LABL) 1 is a good example of a name that is not in our benchmark and is a high conviction top ten holding for the Fund. The company produces numerous types of labels for a variety of consumer products, such as detergent, wine bottles, motor oil, etc. Multi-Color meets the tenets of our investment philosophy of creditworthiness, book value compounding and a discounted valuation.


    On the first tenet, Multi-Color has manageable debt. Our companies must have the wherewithal to weather economic cyclicality as well as the ability to take advantage of opportunities within their industry. Excessive debt brings more than financial risk. Many companies have declined in value not because they could not repay their debt, but because they did not have left over money to reinvest to develop new products or keep up with innovations.

      


  • Third Avenue Small-Cap Value Fund 3rd Quarter Commentary

    Dear Fellow Shareholders:


    On November 10th, we were excited to host Third Avenue's 19th Annual Value Equity Conference. It was a pleasure to see and speak with all of you that attended. As we reflect on the quarter and the conference, we want to share some thoughts from the day for those of you who could not attend.

      


  • Third Avenue Management Comments on Cheung Kong Property

    The Fund holds shares of Cheung Kong Property (HKSE:01113), a large Hong Kong-based property developer and owner that was made independent of CK Hutchison Holdings in mid-2015. That 2015 separating transaction was essentially a spin-off, though with a number of more nuanced benefits, and was successful in creating shareholder value. We have continued to hold shares of Cheung Kong Property on the premise that it is clearly undervalued and it is controlled by exceptionally shrewd and dispassionate business operators. At the time of this writing, shares of Cheung Kong Property trade at an approximate 26% discount to stated book value. We are of the view that, due to certain accounting conventions and the evidence of significant conservatism in asset carrying values, book value materially understates a more realistic net asset value appraisal. In October, Cheung Kong Property and a JV partner announced the sale of a very large asset in Shanghai for approximately HKD 23 billion (50% attributable to Cheung Kong Property), a disposal value slightly higher than two times the value at which Cheung Kong Property had carried the property. Separately, it has been heavily rumored recently that Cheung Kong Property may be in the process of selling another large asset at a valuation that would represent a considerable premium to either book value or Third Avenue Management (Trades, Portfolio) valuation estimates.

    Over long periods of time the company has demonstrated an ability to engage in thoughtful and inventive means of creating value, including the above mentioned spin-off, asset dispositions at extremely attractive prices and share buybacks at attractive prices. An outstandingly well-capitalized balance sheet, which will only be further fortified by asset dispositions, gives management tremendous flexibility in its effort to continue to build value. We suspect Cheung Kong Property management would place very little value on McKinsey's assertions of a low-return environment as it continues to produce outstanding results by using all means of value-creation at its disposal.

    Therefore, to conclude the discussion as to whether we are in a low-return environment, we believe that statistical evidence, fundamental considerations and intuition all suggest that the Third Avenue International Value Fund should not be expected to behave like "the market". We are confident that our investment universe is sufficiently large that we will continue to be able to identify unusually attractive opportunities independent of whether McKinsey et al. prove prescient in their return forecasts. In our experience, more often than not there is a crisis creating opportunity somewhere and, conversely, we are under no obligation to invest in areas we deem unattractive. Were the minimization of tracking error part of our mandate, we would be unable to make such statements.


    From the Third Avenue International Fund third quarter 2016 commentary.

      


  • Third Avenue Management Comments on Prosegur

    Prosegur (XMCE:PSG), a Spanish and Latin American provider of cash-in-transit and security services, announced in late September that it intends to conduct an initial public offering of its cash-in-transit subsidiary. The purpose of the exercise is several-fold. First, the company is of the view that placing an independent value on its cash-in-transit business is likely to result in an increase in the value of Prosegur as a whole. Second, Prosegur is in the early days of building a formidable alarms business in Latin America. The characteristics of the business are such that it requires meaningful up-front capital investment to acquire and equip new customers but tends to require little ongoing capital investment as revenue is generated for years thereafter, conceptually similar to many cable or telecom businesses. The idea is to make the up-front capital investment and then enjoy long periods of prodigious cash flow. A portion of the proceeds from the cash-in-transit initial public offering will be used to accelerate the development of the alarms business. Finally, Prosegur intends to distribute a considerable portion of the offering proceeds to shareholders. Prosegur's share price reacted strongly to this proposed plan.


    From the Third Avenue International Fund third quarter 2016 commentary.

      


  • Third Avenue Management Comments on Petroleum Geo-Services ASA

    We have in previous quarters spoken of our equity and credit investments in PGS (PGS), which is a leader in the offshore seismic survey industry. The industry and PGS with it have faced an oil and gas exploration recession of extraordinary severity. The seismic industry, as well as the broader oil services industry, has seen many bankruptcies of late. Few offshore seismic companies have been able to remain solvent. PGS is among those few. In November the company announced a package of refinancing actions that will further entrench it in the camp of survivors. PGS's primary financing consideration was its ability to deal with a USD 450 million bond maturing in June 2018, the very same bonds owned by the Fund. With regard to PGS equity, lately there has been a growing consensus that the company is grossly undervalued, particularly if one expects an industry recovery. Yet those considerations have been overwhelmed by the above-mentioned financing considerations. Availing itself of its acute undervaluation and a very supportive, long-term oriented shareholder base including the Fund, the company has conducted a private placement of equity for the purpose of refinancing the 2018 bonds. We have subscribed to the equity offering and the company has simultaneously tendered for the 2018 bonds at a considerable premium to the previous trading price, furthering what had already been a successful credit investment for the Fund. Our bonds will be partly cashed-out and partly termed-out, with our equity and remaining bond position both materially "credit-enhanced" as a result. The equity offering was so well received that it was significantly oversubscribed at a mere 2.5% discount to the previous day's closing price and the share price appreciated considerably in response to the capital raise providing early validation that a financing consideration was standing in the way of appreciation. We expect the seismic industry to show gradual improvement as the oil industry's patently unsustainable exploration frugality inevitably abates. PGS is likely to emerge from this recession in a very strong position.


    From the Third Avenue International Fund third quarter 2016 commentary.

      


  • Third Avenue Management Comments on Tenon Ltd.

    The Fund's largest holding is in the shares of Tenon Ltd, a New Zealand-listed and headquartered company with building products distribution operations throughout the United States and wood products manufacturing operations primarily in New Zealand.

    Roughly one year ago, the company announced a strategic review that had a high probability of resulting in a liquidation of the company. During the most recent quarter, Tenon (NZSE:TEN) announced that the strategic review has resulted in the sale of its U.S. operations to a U.S. private equity firm representing the first major step towards that liquidation. In connection with the sale announcement, the company also published the results of an independent appraisal of Tenon's business value, which identifies a valuation approximately 23% higher than market value at the time of this writing. The announced sale crystallizes the majority of Tenon's total identified business value for cash and within the expected valuation range. Meanwhile the effort to complete the strategic review, as it relates to Tenon's remaining operations, remains ongoing. In mid-November shareholders approved the announced sale transaction and a capital return plan that will see Tenon distribute approximately 60% of its current market capitalization to shareholders in late December. Following that distribution it is very likely that Tenon will no longer be among the Fund's largest positions though we view the likely sale of its remaining operations as yet another very attractive proposition for shareholders.


    From the Third Avenue International Fund third quarter 2016 commentary.

      


  • Third Avenue International Value Fund 3rd Quarter Letter

    Dear Fellow Shareholders:


    FUND PERFORMANCE

      


  • Third Avenue Comments on Adient

    We received shares of Adient (NYSE:ADNT) upon its spin-off from JCI at the end of October. Adient is the market leading provider of automotive seating in North America, Europe and China. It has longstanding relationships with all of the major global Original Equipment Manufacturers as well as growing regionals such as Brilliance, Great Wall Motors, SAIC Motor, Tata Motor, and newer manufacturers such as Tesla. It also has an equity JV with Yanfeng Automotive in China for interior trim systems such as door panels, instrument panels and consoles. The company is geographically diversified, providing some balance with regard to regional economic cycles. Seating, while it sounds fairly mundane, is actually benefiting from enhanced features to increase passenger comfort such as heating/cooling, massage, lumbar support and advanced seat adjustability as well as an increasing shift globally to SUVs, which have higher seating content. For luxury vehicles, the second row bench seat of yesteryear is a thing of the past, having been largely replaced by captain's chairs with all of the passenger comfort amenities. This trend is also moving toward mass market vehicles, increasing the percentage of higher margin seating solutions. Longer term, the opportunity for further enhanced seating exists with conversion of the third row of seats, autonomous driving as well as opportunities to expand into adjacent areas for seating, e.g., commercial vehicles, railway and aircraft seating. Now a standalone entity, Adient has greater ability to focus on growing its core business, along with opportunities for self-help. We believe the company has been under earning as the business has been somewhat capital constrained under its former parent. Also, there are opportunities for margin improvement driven by operating efficiencies and cost reduction initiatives.



    From Third Avenue Management (Trades, Portfolio)'s Value Fund fourth quarter commentary.  


  • Third Avenue Comments on Lennar

    At our Value Conference, our colleagues on the Real Estate team revisited one of Marty Whitman's quotes from October 1996: "Given Third Avenue's investment criteria, it is more accurate to view the situation as the industry selecting the Fund, rather than Third Avenue choosing the industries in which to invest!' We think this quote superbly describes the opportunity the Value Fund saw in establishing a position in Lennar Corporation common in the quarter, as the shares somewhat inexplicably sold off from nearly $50 at their recent peak and allowed us to establish a position at just over $41 per share.

    We have followed Lennar (NYSE:LEN) for years as the Real Estate team reviewed the position at our weekly research meetings, and think the investment case has only improved on a fundamental level despite the widening valuation discount in the shares. Lennar meets every tenant of our investment philosophy.

    The balance sheet is strong and improving. Net debt to total capital has fallen 5.3% since year-end 2011 to 45.8% as of 3Q16, and net debt to total assets is not challenging at 37%. Much of this improvement is the result of management's soft pivot land strategy, which is reducing the duration of its owned land bank and converting its undervalued balance sheet assets into cash. This balance sheet improvement should continue as Lennar's $400 million redeemable convertible debt matures in November 2016, which should further reduce balance sheet leverage by 200 basis points.

    From a compounding point of view, Lennar continues to build value through developing its land bank into saleable housing units, and by monetizing further transaction values through its mortgage origination and title insurance offerings to its home buyers. Notably, we are pleased and supportive of Lennar's offer to acquire WCIC Communities (NYSE:WCIC), a top holding of the Third Avenue Small-Cap Value Fund, as Miami-based Lennar knows WCIC's 100% based Florida assets intimately. Lennar not only sees compelling opportunities to monetize WCIC's over 14,000 homesites, but also synergy opportunities from management and supplier overlap. Further, in our opinion, Lennar negotiated an extremely good price for WCIC, which when considering the value of WCIC's brokerage operation and the hidden value of WCIC's owned coastal tower pads, will likely bring tremendous value as Lennar has a strong balance sheet to move construction of these assets forward.

    Lennar's resource conversion outlook is compelling, with management likely to monetize its non-homebuilding investments in FivePoint and Rialto over the next 12-18 months through sales or spin-outs, and then over time, potentially further monetize its Multi-Family and even its Financial Services divisions through sales or partnerships. The value creation of Rialto, its 3rd party asset-light asset management unit with over $7.3 billion in AUM, and of FivePoint, its development and management company with over 40,000 homesites and 20 million square feet of commercial real estate assets in highly coveted California markets are, in our opinion, completely overlooked by the markets from a net asset value perspective, as their income statement impact today belies their true value to Lennar despite being worth more than 25% of the underlying value.

    Perhaps Lennar's most exciting aspect is the strength of the investment case and current undervaluation taken without the likely strong tailwind of an improving housing cycle. At our Value Conference we talked about taking advantage of optically poor headlines, and Lennar is another real-time example. We think some of the weakness in Lennar shares in October was due to a weak single family home starts number for September, down 9.5%. The noise of monthly home start numbers do not impact the long-term value we see in Lerman While Lennar's sales and earnings are likely to strengthen as the single family construction cycle continues to recover from an extended cyclical low looking back to 2007, we see this as icing on the cake of our strong investment case. At our cost of just over $41 per share, we see over 25% upside to our estimate of fair trading value of $53, and longer term potential for shares to trade to over $66 per share if the single family cycle gains steam.



    From Third Avenue Management (Trades, Portfolio)'s Value Fund fourth quarter commentary.  


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