Third Avenue Management

Third Avenue Management

Last Update: 2014-02-18
Related: Martin Whitman

Number of Stocks: 170
Number of New Stocks: 22

Total Value: $5,456 Mil
Q/Q Turnover: 8%

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

Third Avenue Management Watch

  • Third Avenue Management Comments on SemGroup

    In early August SemGroup (SEMG), an owner and operator of oil and gas midstream assets, including pipelines and storage and blending facilities, closed on an opportunistic purchase of assets from Chesapeake Energy. The assets nicely complement SemGroup's existing core assets that stretch from Colorado to Oklahoma. While SemGroup will have to spend money to complete the assets—money that financially distressed Chesapeake likely could not justify—we view the expenditures favorably given their high return characteristics.From Third Avenue Management's fourth quarter 2013 commentary.  


  • Third Avenue Management Comments on Dundee Corporation

    During the quarter the Fund established a meaningful position in shares of Dundee Corporation (TSX:DC.A), a Toronto-based holding company run by founder Ned Goodman. Having cut his teeth in investing at Brookfield Asset Management's predecessor company in the 1960s and Beutel Goodman which he co-founded in 1967, Goodman would go on to found Dundee in 1991. Goodman has been a magnificent allocator of capital at Dundee, building businesses and 11 investing in public and private companies. The uncertain macro backdrop post-Financial Crisis has given Goodman a penchant for hard assets rather than paper assets, resulting in a unique collection of investments, ranging from financial services and real estate to metals, mining, energy and agriculture businesses, including control of the largest organic beef operator in North America with more than 12,000 head of cattle. While past performance is no guarantee of future results, Dundee has generated an impressive 18% annualized return for its shareholders over the past twenty years.To understand Dundee requires a look past its income statement, where historical reported results are volatile and muddied by consolidated financials of entities no longer owned or consolidated, as well as gains on the sale of underlying securities and businesses, including the 2011 sale of a controlling stake in Dundee Wealth to Bank of Nova Scotia for C$1.4 billion and the spinout of a majority interest in Dundee Real Estate Company earlier this year. Today, Dundee's enterprise value is close to the value of its public securities holdings, net of a modest amount of debt. "Free" are the company's private investment portfolio and private subsidiaries, carried at book value, which together are close to half of Dundee's market value. While there is certainly an element of "key man risk," as any eventual successor will have enormous shoes to fill, we think hard asset values, values of publicly traded securities and a significant discount to our estimate of net asset value provide a meaningful margin of safety for the investment.We have followed Ned Goodman and Dundee for a number of years, as a like-minded operator and investor with significant ownership aligning his interests with those of his shareholders. The position reflects a true collaboration with our investment team colleagues. Vic Cunningham provided much of the recent legwork, while Ryan Dobratz offered key insights into the real estate assets and their valuations.Legg Mason is a premier mutual fund complex that dates back to the 1980s. While the firm has recently suffered significant asset outflows in the wake of subpar investment returns, the company has retained a strong franchise (with several well-known brands under its umbrella), a diversified asset mix, and a sound balance sheet. Under new leadership, the business appears to be on the mend and capital allocation continues to be favorable—management has repurchased $1.2 billion of shares in the past three years (shrinking the share count by more than 20%) and has been increasing the dividend. Moreover, the relative investment performance among its stable of investment managers is beginning to improve. While the company is still under-earning its potential in our view, its cash flows remain strong, aided by a large deferred tax asset resulting from net operating losses generated in prior periods. Fund management initiated its position in Legg Mason Common at an implied free cash flow yield of about nine percent, and we believe the company's cash flows could increase markedly in the near future if performance and asset flows continue to improve.From Dundee Corporation's fourth quarter 2013 commentary.  


  • Third Avenue Management Comments on Tellabs

    Unfortunately, though, there is a "dark side" to resource conversion activities—the dreaded "take-under", where a company is acquired for less than its value. While managements and investment bankers will often use a premium to market price to justify a transaction value, we look instead at the offer price versus intrinsic value. Tellabs' (TLAB) announcement in October to sell itself to Marlin Equity Partners, a private equity firm, is a take-under, in our opinion. Under the terms of the transaction, Tellabs agreed to a cash tender offer of $2.45 per share, which excluding the $551 million of cash on Tellabs' balance sheet, was only 0.37x revenues and attributed no value to the company's intellectual property and real estate. Third Avenue filed a Form 13D in November 2012,where we sought to reserve the right to meet with management, the Board and other shareholders in order to enhance shareholder value. Over that time, we were successful in nominating two members to the Board, and the company paid a special dividend and took steps to reduce costs. While the purchase price is disappointing, it still represents a 17% premium to the price of the stock when we filed our 13D (adjusted for dividends received), highlighting the importance of buying at a discount to NAV to provide a margin of safety. However, we acknowledge a less than optimal result over the life of this investment. The telecom equipment industry in which Tellabs participates is fraught with issues—from competition, technology leapfrogging and the need for high R&D investments, to a highly concentrated customer base and resultant pricing pressure. Despite its super-strong balance sheet, its operating and acquisitions track record was checkered.From Third Avenue Management's fourth quarter 2013 commentary.  


  • Third Avenue Management Comments on Apache

    In August, Apache (APA) announced that it agreed to sell a 33% stake in its Egyptian oil and gas business to Sinopec (SHI) for $3.1 billion. This price equated to $34 per barrel of proved reserves, or a significant premium to the valuation of Apache common of about $15 per barrel prior to the announcement of the transaction. Given the recent political turmoil in Egypt, we were pleasantly surprised at the higher

    than expected price received. Apache expects to use the proceeds to reduce leverage, buy back shares and fund other capital spending—in effect using the proceeds from one value enhancing resource conversion to fund other types of desirable conversion events. With this sale, the company will have sold around $7 billion of assets this year, well above its previous plans to sell $4 billion of assets, enabling it to diversify more into North America on-shore.From Third Avenue Management's fourth quarter 2013 commentary.   


  • Third Avenue Management Comments on Applied Materials and Tokyo Electron

    In September, Applied Materials (AMAT) announced plans to merge with Tokyo Electron ("TEL") (TSE:2760). Both Applied Materials and TEL are well respected in the semiconductor equipment industry. We initially invested in Applied during a cyclical downturn in the industry, yet with the belief that growth prospects were bright over the longer term due to continuing technology transitions as semiconductor chips get smaller and more complex and the potential for Applied Materials, specifically, to gain further market share. The transaction is structured such that Applied Materials shareholders will own 68% of the new company with TEL shareholders getting the remainder. The benefits of the merger for Applied shareholders include expanded market opportunities (particularly in processes such as etch and selective materials removal) and more efficient research and development. The companies estimate potential synergies totaling $250 million at end of the first year and $500 million by the end of the third year, driven from enhanced efficiencies in the supply chain, manufacturing, IT and corporate overhead. While we are optimistic about consolidation in the industry longer term, Applied's stock price increased on news of the transaction to a level where the valuation was not as attractive as other opportunities and we exited the position, locking in our 25% internal rate of return on our investment.From Third Avenue Management's fourth quarter 2013 commentary.  


  • Third Avenue Management Comments on Vodafone

    Fund Management initiated a position in Vodafone (VOD) Common during the quarter. Vodafone is a leading provider of telecommunications services based in the United Kingdom. This investment is discussed in more detail in this quarter's Third Avenue International Value Fund shareholder letter. The Vodafone common investment made by the Fund was prompted by the company's sale of its 45% stake in Verizon Wireless at a tremendous price (9.4 times EBITDA). Shares of Vodafone Common were purchased at less than five times pro-forma EBITDA and at a mid-single digit dividend yield in the Fund. Although conditions in the European telecommunications industry are difficult, Vodafone's business is very cash generative and the proceeds from the Verizon Wireless transaction will enable the company to reinvest more in its networks than many of its competitors while maintaining a very strong financial position and a healthy dividend. Vodafone also has substantial exposure to emerging markets, such as India and Africa, that are experiencing tremendous growth in demand for smart phones and data.

    From Third Avenue Management's fourth quarter 2013 shareholder letter.  


  • Billionaires Hot for Coal on a 52-week Low

    Based on the first eight months of the year, U.S. coal production is down by 3% year over year, as reported by the U.S. Energy Information Administration. The U.S. coal industry sector currently has seven companies out of 22 on a 52-week low but only two Midwestern companies, Cloud Peak Energy Inc. (CLD) based in Wyoming, and Hallador Energy Co. (HNRG) based in Colorado, have billionaire guru stakeholders, as of the second quarter of 2013.

    Coal Sector Highlight: Cloud Peak Energy Inc. (CLD)  


  • Third Avenue Management’s High-Return Four

    Third Avenue Management, considered a “balance sheet investor,” has a portfolio of 145 stocks, 18 of them new, and a total value of $5.09 billion, with a quarter-over-quarter turnover of 8%. The portfolio is currently weighted with top three sectors: financial services at 20.5%, basic materials at 15% and technology at 14.9%. The firm has averaged a return of 11.41% over 12 months. In 2012, Third Avenue Management returned 27.48% against the S&P500’s 15.4%.

    Led by its founder and chairman, Martin Whitman, Third Avenue Management measures a company’s value based on its current balance sheet versus projected earnings and revenues. As such, Third Avenue Management is focused on the here and now reality of a business, investing in safe companies that are priced low.  


  • Third Avenue Management Comments on Susser Petroleum Partners

    Susser Petroleum Partners (SUSP): In September 2012, Susser spun off its Susser Petroleum Partners ("SPP") wholesale fuel business into a Master Limited Partnership (MLP) structure that provides fuel to Susser, as well as to third parties. While this structure creates a degree of "analytical noise" as it relates to the company's reported GAAP financials, it creates a more appropriately valued "currency" for SPP that it can use for growth and acquisitions while it effectively lowers Susser's cost of capital. Moreover, in addition to being the controlling general partner and majority limited partner of the MLP, Susser also holds a hidden asset of sorts in the form of Incentive Distribution Rights (IDRs) which effectively entitle Susser to an increasing portion of the MLP's distributions as it grows. While the distributions will likely be modest over the near term, SPP has attractive growth opportunities over the long-term through organic growth, acquisitions, and Susser stores being "dropped down" into the MLP via sale-leaseback transactions. The business model also provides a significant competitive advantage to Susser as it is able to take advantage of SPP's combined retail and wholesale fuel purchasing volume to obtain attractive pricing and terms.

    • Financial position: Since coming public in 2006, the strength of Susser's balance sheet has steadily improved. In the wake of the SPP initial public offering and resulting proceeds, Susser has been able to refinance its debt at attractive rates and ultimately reduce its net debt to about one times EBITDA 3 (down from about four times EBITDA in 2007).  


  • Third Avenue Management Comments on Brookdale Senior Living

    Brookdale Senior Living Brookdale (BKD) is the largest operator of senior housing assets in the United States, with approximately 549 centers and 48,000 units. Brookdale provides room, board and hospitality services to the elderly, primarily 80 years old and older, who are generally in good health but require a base level of healthcare, with a primary focus on private pay  


  • Third Avenue Management Comments on Hersha Hospitality

    Hersha Hospitality Hersha (HT) is a U.S. REIT that owns 64 hotels containing 8,600 rooms. Hersha owns a young and high-quality portfolio of limited-service hotels in quality urban centers with high barriers to entry. Approximately 90% of the company's EBITDA is generated from six markets: New York City (46%), Philadelphia (12%), Washington DC (11%), Boston (10%), Los Angeles (6%), and Miami (5%). Limited service hotels typically have significantly higher margins and less volatile cash flows and, as we noted earlier this year, hotel operators have more flexibility to adjust room rates in response to economic conditions. Hersha has a reasonable financial position (mostly non-recourse debt) and is likely to compound NAV in the next couple of years, as the lodging recovery continues and its younger assets and development pipeline stabilize. Hersha Common is trading at a meaningful discount to NAV and we believe it is a likely take-over candidate, given its size and its unique portfolio.

    From Third Avenue Management's semi-annual 2013 report.  


  • Third Avenue Management Comments on Tanger Factory Outlet Centers

    Tanger Factory Outlet Centers Tanger (SKT) is a U.S.-based real estate investment trust that owns andoperates43retailoutletcentersintheU.S. and Canada. Tanger has a leading position in outlet centers alongside Simon Property Group's Chelsea subsidiary (together they control 80% of the outlet malls in the U.S.). The outlet business has been extremely strong over the past few years, as rental rates and occupancy trends have remained strong due to the value orientation offered by the distribution channel. Tanger's centers have averaged97%occupancyover the past five years and rental rates have grown over 15% annually. Tanger has led the retail sector in internal and external growth, due to their low occupancy cost ratios and high demand from tenants. To put it in perspective, most luxury retailers state that the outlet distribution channel is among their most profitable, and have expressed an interest to continue to expand this channel. Tanger has one of the strongest balance sheets in the retail sector (approximately 30% net debt-to-assets). It is run by a conservative and incentivized management team and has strong development growth prospects, as it continues to capitalize on the trend of consumers and retailers shifting to the outlet channel.

    From Third Avenue Management's semi-annual 2013 review.  


  • Third Avenue Comments on Post Properties

    Post Properties Post Properties (PPS) owns and operates one of the most highly coveted apartment portfolios in North America with approximately 19,000 units in high-job-growth markets such as Atlanta, Dallas, and Washington D.C. The portfolio is currently more than 95% leased. The company is known for its high-quality luxury properties in infill locations desired by rising professionals who can afford premium rental rates. With the recent selloff in U.S. REIT stocks, Post Common traded at a 52-week low and allowed the Fund to establish its position at a price that represents a discount to our conservative estimate of net asset value (NAV) and substantially below its potential value to a strategic buyer in a negotiated transaction. With a superior balance sheet (net debt-to-assets of less than 30%) and internal growth prospects (through higher rental rates and development opportunities), we believe it is likely the company will be able to compound NAV by 6% to 10% annually, over the next two to three years, without having to raise external capital in order to do so.

    From Third Avenue's semi-annual 2013 review.  


  • Third Avenue Management Update

    Founded by veteran value investor Martin Whitman in 1968, Third Avenue Management is an asset management firm that uses a disciplined value approach. At present, Third Avenue Management has around $ 11.1 billion in assets under management. Third Avenue specializes in global and domestic equities, debt instruments, and special situations.

    The updated portfolio of Third Avenue Management lists 145 stocks, 18 of them new, a total value at $5.09 billion, and a quarter-over-quarter turnover of 8%. The portfolio is currently weighted with top three sectors: financial services at 20.5%, basic materials at 15% and technology at 14.5%.  


  • Third Avenue's Amit Wadhwaney - How Do Good and Financially Sound Companies Become Cheap?

    Wadhwaney views himself as a very patient investor. He is willing to buy companies that are depressed in industries that have difficult barriers to entry.

    What he will not buy is a depressed company in an industry with limited barriers to entry.  


  • Third Avenue Management Comments on Newhall Holding Company LLC

    Newhall Holding Company LLC [/size] [size=13px; line-height: 1.22]( NWDHU) Update: As we noted in our October 31, 2012 report to Fund shareholders, based on the limited trading of Newhall Common, the implied equity market capitalization of Newhall Holding Company LLC was approximately $412 million. We highlighted a "back of the envelope" calculation indicating that the net asset value based on current market conditions should easily be in excess of $1 billion. We also illustrated how house price inflation can translate into much more dramatic lot price appreciation. In our report, we illustrated how a 20% increase in house prices could result in more than a 100% increase in lot prices. According to Case Shiller, Los Angeles has seen the largest drop in for-sale home inventory and has the most positive home price outlook (14%in 2013) of major U.S. cities.The prospects for a continued U.S. housing recovery have resulted in high demand from home builders for buildable lots in major markets and corresponding demand from investors in public and private companies that control land for residential development. Despite its quasi-private status, investor demand for Newhall Common has recently surged, trading has been more active and recent trading prices now reflect an equity market capitalization of over $800 million—nearly double the price six months earlier. The Fund sold 1 million units of Newhall Common during the quarter(approximately 3% of its position) after it received an unsolicited bid from a buyer actively seeking to establish a position.At quarter-end, Newhall Common was the Fund's third largest holding (4.1% of net assets) andwe have no intention of further reducing the position at current prices. While the company still has some land entitlement issues to resolve, we are very confident that Newhall Ranch will be one of the few major providers of residential lots in Los Angeles for the next 15 to 20 years.

    From Third Avenue Management's semi-annual 2013 letter.
      


  • Third Avenue Management Comments on PNC Warrants

    To illustrate, here is our base case for the PNC warrants (PNC): The Fund purchased the warrants for approximately $11 each. Each warrant provides the Fund with the right to purchase one share of PNC Common stock at $67.33 per share at any time through December 31, 2018. PNC's book value is currently $68 per share, which we conservatively estimate will increase by 8% per year (net of dividends paid). At April 30, 2013, PNC Common traded at $67.88 per share (1 times book value). Simply compounding book value at 8% per year would result in a book value of about $105 per share at the end of 2018. We assume that PNC Common will continue to trade at1timesbookvalue,or$105pershare at expiration, resulting in each warrant having an intrinsic value of approximately $38 ($105 minus $67.33). Our base case would result in a 25% IRR over the life of the investment, or a 3.5 times multiple on the original $11 invested.

    We believe our base case assumptions are fairly conservative in that we do not project increasing ROE or the common stock trading in excess of 1 times book value. It seems likely that if banking profits improve (higher ROE), stock prices could trade at 1.5 to 2 times book value, which would result in an exceptional return on the warrants. For example, if book value per share is $125 and PNC Common trades at 1.5 times book value at the end of 2018, each warrant would have an intrinsic value of about $120, or nearly an 11 times multiple on the original $11 investment (41% IRR over 5+ years).  


  • Third Avenue Management's Second Quarter Top Increases and Decreases

    Marty Whitman’s fund, Third Avenue Management, released their second quarter portfolio changes on July 1. The fund currently holds 36 stocks valued at $2.4 billion. The following five companies represent the largest increases and decreases in Third Avenue’s holdings during the second quarter 2013.

    [b]Increases  


  • Third Avenue Management Comments on Blucora

    Blucora (BCOR) is a company that fits within our basket of "special situation" investments, securities whose underlying dynamics do not easily lend themselves to conventional analysis. Although it was a fairly well-known company in prior years under its former name InfoSpace, today it largely flies under the radar of Wall Street investors and analysts (in part due to the June 2012 name change) and in some respects,we believe, is misunderstood.

    InfoSpace saw revenues grow by more than 50%compared with 2011. With TaxACT, the business continues to benefit from the ongoing migration of tax preparation away from paper and professionally-prepared filings toward electronic and self-prepared filings. In 2012, TaxACT saw revenues grow by more than 10% compared with 2011.  


  • Third Avenue Management Comments on Ascena

    Ascena Retail Group (ASNA) is a specialty retailer primarily serving the female demographic within the U.S. While history has shown that retailing can be a very tough business over the long-term, there are multiple elements of Ascena we find unusually attractive. That we had owned its predecessor, Dress Barn, nearly 10 years ago and have followed the company's development in more recent years, only increased our comfort level.  


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