Weyerhaeuser Common (WY) is an example of a security that offers multiple ways to win. The Fund initiated its investment in Weyerhaeuser Common at a significant discount to conservative estimates of NAV during a severe cyclical downturn in housing and forest products. Weyerhaeuser is one of the largest timberland owners in the U.S., with secondary businesses in homebuilding, wood products, and cellulose fibers. Our initial business plan was to invest prior to the company converting its structure into a real estate investment trust. Weyerhaeuser's timber REIT peers traded at much narrower discounts to NAV, notwithstanding our opinion that Weyerhaeuser had a superior financial position and owned higher-quality timberlands. We believed that upon conversion to a REIT, Weyerhaeuser Common would trade more in-line with its REIT peers. Additionally, once Weyerhaeuser's subsidiaries (homebuilding and wood products) returned to profitability, they could be candidates for resource conversions (e.g., spin-off or sale). Our initial assessment was correct. In a complex transaction, Weyerhaeuser converted into a REIT in mid-2010. Shortly thereafter, the price-to-value discount shrunk materially. Throughout the housing recession, Weyerhaeuser's cellulose fiber division continued to be profitable while its timber, housing and wood products divisions struggled. For the quarter-ended June 30, 2012, the wood products division had its best quarter in six years and the homebuilding division reported increased profits coupled with dramatic improvement in closings and backlog. With the housing market in the U.S. starting to show signs of a recovery, the company may now be in a position to consider spinning off its homebuilding and wood products divisions. While we believe these two divisions could be worth 15% to 20% of Weyerhaeuser's value, market participants seem to ignore their value because they have not generated consistent profits throughout the downturn. As a result, Weyerhaeuser Common is still undervalued based on private market comps in the timber industry, but with the U.S. housing recovery gaining momentum and Weyerhaeuser's business turning the corner, our patience appears to be paying off. Plus, with recent additions to the Board and upcoming management changes, resource conversion seems more imminent than it did at the time of our initial investment.
From Third Avenue's third-quarter letter, Michael H. Winer Co-Portfolio Manager of Third Avenue Real Estate Value Fund and Jason Wolf, Co-Portfolio Manager of Third Avenue Real Estate Value Fund.