Third Avenue Real Estate Value Fund Second Quarter 2014

Dear Fellow Shareholders, We are pleased to provide you with the Third Avenue Real Estate Value Fund’s (Fund) report for the quarter ended July 31, 2014.

Portfolio Activity

During the quarter the Fund added to some of its core holdings (Weyerhaeuser, Westfield, and Cheung Kong), funded its pro”rata share of Colonial’s rights offering, and provided exit financing for IVG Immobilien (XTER:IVG, Financial) as it moved closer to emerging from bankruptcy. The Fund also eliminated three Real Estate Investment Trusts (REITs), (Derwent London, Federation Centres, and Scentre Group) and one real estate related company (Rayonier Advanced Materials) for valuation purposes, as well as another position (Consolidated Tomoka) for portfolio management reasons. The proceeds from these sales were primarily reallocated to companies with strong ties to the U.S. residential markets, including some existing holdings (PNC TARP Warrants and Starwood Waypoint Common) and two new positions (Realogy Common and Zions Common). Weyerhaeuser Common (WY, Financial) was increased prior to the company separating its homebuilding business via a split”off transaction in late July. In that transaction, the Fund elected to forego receiving shares in the homebuilding entity (now listed separately as Tri”Pointe Homes), essentially increasing its investment in the company’s timberland portfolio and other remaining assets (wood products and cellulose fibers). Both Weyerhaeuser and Tri”Pointe Homes seem well positioned as stand”alone companies that should continue to benefit from a recovery in U.S. housing (more below). However, at the time of the transaction Weyerhaeuser Common traded at a larger discount to our estimate of private market value, while offering superior growth prospects and resource conversion potential relative to Tri”Pointe common stock. Following the additional investment, Weyerhaeuser Common is the largest single position in the Fund.

The Fund’s position in Westfield Common (WFD, Financial) was increased during the quarter ahead of a corporate restructuring. The company previously owned a world”class portfolio of malls in Australia, the U.S., and the U.K. and also controlled some of the premier retail”led development projects in several gateway cities globally. During the quarter, Westfield received the necessary approvals to spin”off its Australian portfolio into Scentre Group (ASX:SCG, Financial), a newly formed Australian REIT. After the spin, the Fund elected to sell its new position in Scentre Common as it traded at a premium to net asset value (NAV). The Fund retained its investment in Westfield Common. The renamed company (Westfield Corp.) owns the U.S. and U.K. mall portfolios and has an opportunity to meaningfully increase its NAV over the next three to five years as it delivers its major development and expansion projects, including: the retail mall at the World Trade Center site in New York City, the expansion of the Westfield London mall in West London, a brownfield development in Milan, and the continued redevelopment of the Century City sub”market of Los Angeles.

The Fund took advantage of market volatility to increase its investment in Cheung Kong Common (HKSE:00001, Financial). Cheung Kong is a Hong Kong based holding company with substantial investments in real estate, infrastructure, power, and other private”equity like investments through its 50% ownership stake in separately”listed Hutchison Whampoa. Similar to Weyerhaeuser and Westfield, Cheung Kong has radically transformed its business model over recent years. In Cheung Kong’s case it has actively managed its portfolio of investments by selling down exposure to yield”oriented assets in Asia (ports, commercial real estate, etc.) and reinvested the proceeds into “real assets” in Europe on an opportunistic basis. These investments will ultimately be streamlined into more efficient and productive platforms over the next few years. It is our view that as the management teams of all three businesses execute on their forward thinking business plans, the earnings power of each company will meaningfully exceed expectations and result in industry leading growth in NAV when viewed on a per share basis.

The Fund also increased its position in Colonial Common (CLP, Financial) during the quarter. As highlighted in previous quarterly letters, Colonial is a real estate operating company (REOC) based in Spain that owns a high”quality office portfolio in Europe, with holdings in Madrid, Barcelona, and Paris. Previously, Colonial had been saddled with unsustainable levels of debt. To pay down those liabilities and right size its capital structure, the company completed a €1.3 billion rights offering during the quarter in which the Fund participated by exercising the Colonial Rights it had received after purchasing Colonial Common earlier in the year. Furthermore, the Fund also purchased additional Colonial Rights as they became freely tradable and ultimately oversubscribed to the offering. Colonial Common is now a top position in the Fund and we believe it offers significant embedded growth potential as (i) the portfolio is currently more than 20% vacant; with its recently strengthened financial position and improving market conditions, the company should be able to increase occupancy, cash flows and underlying value; and (ii) the company could accelerate the monetization of its deferred tax asset as it boosts profits of its own portfolio and through additional acquisitions as a consolidator in the Spanish office markets.

IVG (ASX:IVG) is another portfolio position that offers significant growth potential. As outlined in previous letters, IVG is a REOC based in Germany that owns one of the largest office portfolios in the country. It also has a large asset management platform and the rights to develop oil and gas storage facilities in Northern Germany. Like Colonial, IVG owned valuable assets, but they were encumbered by too much debt. IVG announced in early 2013 that it was going to be unable to refinance an upcoming maturity. This led to a dramatic sell”off of all securities across IVG’s capital structure (debt and equity). After conducting extensive analysis of the company’s assets and capital structure, we determined that the IVG Convertible Notes should be the fulcrum security (i.e., the most senior issue in the capital structure to participate in a reorganization). The Fund ultimately purchased a large stake in IVG Convertible Notes and participated with other Convertible Note holders in an ad hoc committee to negotiate with the company and other stakeholders to reach an out”of”court restructuring. A consensual deal with all stakeholders could not be reached, forcing the company to file insolvency proceedings in Germany. In court, the company proposed a debt”for”equity restructuring plan that granted 80% of the equity to syndicated lenders and 20% of the equity to convertible bondholders. The preferred equity and common equity received nothing pursuant to the plan and were effectively wiped out. The plan was approved by the necessary stakeholders as well as by the Insolvency Court in late July. Consequently the Fund’s position in the IVG Convertible Notes will be converted to common equity in September. After the debt”for”equity swap, IVG will be a well”capitalized REOC with an opportunity to meaningfully increase the cash flows as it leases up its portfolio, which is only 80% leased today. The company could also seek strategic alternatives for its remaining assets to realize the highest and best use of these legacy investments.

The Fund initiated two new positions: Realogy (RLGY, Financial) Common and Zions Common. Realogy is the preeminent and most integrated provider of residential real estate services in the U.S. As the nation’s largest owner and franchiser of residential real”estate brokerages, it has more than 13,500 offices and 247,000 sales associates. To put the scale of the company’s platform in perspective, the company was involved in approximately 26% of brokered domestic existing home sale transaction volumes in 2013, representing a market share two times larger than that of Re/Max Holdings, its nearest competitor. During the quarter, the company’s stock declined by more than 20% following reduced expectations for existing home sales growth in 2014, allowing the Fund to establish the position at an attractive price. While the short”term outlook might be uncertain, the prospects of Realogy continuing to increase its profitability over the long”term seem promising. For instance, existing home sales in the U.S. were only 5.1 million in 2013, well below a cycle high of 6.5 million in 2005 and 15% below post”crisis peak set in mid”2013. Existing home sales as a percentage of total inventory are also at all”time lows and there exists significant potential upside to the housing recovery, considering ten years of population growth, immigration, and household formation. As home sales improve from such depressed levels, the business should become much more profitable. And the embedded earnings power is quite substantial when considering Realogy’s cash flow is more than 30% below peak levels. The company also has substantial deferred tax assets in the form of a $2.1 billion net operating loss carry forward that will minimize future cash tax payments. Upon achieving its target leverage levels (three times debt to EBITDA), the company is likely to explore various ways of returning that capital to shareholders by either instituting a dividend or share buyback program.

Zions (ZION) is a bank holding company that conducts banking operations through its eight subsidiary banks that control more than $45 billion of deposits in the Western region of the United States. The Company has more than 50% of its assets in residential loans, commercial loans, or loans secured by real property. Zions is known to have one of the premier footprints in the banking space with about 80% of its business being derived from Utah, Texas, and coastal California. Zions also controls one of the top small”business lending franchises in the country. Zions Common has been trading at a discount to its peers and book value as the bank has had a meaningful share of its capital invested in collateralized debt obligations (CDO), which recently led to Zions failing the Fed’s ‘stress test’. Additionally, Zions is a very asset”sensitive bank, so its earnings have been disproportionately impacted in this low”interest”rate environment relative to some of its peers who generate a greater share of earnings from fee income versus interest income (as net interest margins have been squeezed). The Fund purchased Zions Common after the company disclosed positive developments including (i) the CDO portfolio has been further reduced during the second quarter, (ii) the company completed a $550 million follow”on equity offering, and (iii) the company has passed the ‘stress test’ and the Fed has approved the company’s revised capital plan. After these developments settle in, it is our view that Zions will once again be considered a well”capitalized bank with outsized growth prospects given its geographic footprint. As management takes steps to generate additional fee income, realize other efficiencies, and boost profitability, the discount to peers and book value should close. If not, it is not inconceivable that Zions would be a highly desirable acquisition candidate for a larger bank or financial institution that could increase the productivity of the Company’s deposit base while also gaining exposure to some of the most highly sought after banking markets in the United States.

Residential Markets

After adding to the investments in PNC TARP Warrants and Starwood Waypoint Common (SWAY, Financial), as well as initiating positions in Realogy Common (RLGY, Financial) and Zions Common, the Fund has approximately 26% of its net assets invested in the common stocks of companies with strong ties to the US residential markets. These consist of well”capitalized companies involved in nearly every link in the residential ‘value chain’. Current investments include land development (Newhall Land), timber (Weyerhaeuser, Rayonier), building materials (Lowe’s), brokerage (Realogy), mortgage financing (Zions, PNC, Wells Fargo), mortgage origination and servicing (PHH), multi”family rental (Post Properties), single”family rental (Starwood Waypoint), senior housing (Brookdale), and urban development (Forest City).

We recognize that there has been some recent “choppiness” in the U.S. residential markets and most of the aforementioned companies have been impacted as a result. One issue is that new home purchases have fallen by approximately 12% year”over”year and mortgage applications have also declined by about 30% during the first half of the year. Also of concern is that annualized home starts in the U.S. remain below the 1.07 million level reached back in October 2013. However, we view this pullback as a speed”bump in what should otherwise be a multi”year recovery in U.S. housing with the primary upside from here stemming from a recovery in volumes as opposed to pricing. This view is based on Fund Management’s belief that: 1) the implementation of Qualified Mortgage Standards (QMS) at the beginning of the year led to weakness in mortgage activity and home sales but the uncertainty of QMS has largely been removed as the new guidelines have been integrated into the process at every major lender and

2) that the excess inventory that was built during the 2003”2006 timeframe (more than two million annually) has largely been absorbed now as occupancy rates for apartments have climbed to all”time highs (95%) and inventories of for”sale homes have fallen to historically low levels (four months’ supply) which has led to a sharp recovery in home prices on a national basis (up by nearly 20% over the past two years). Therefore, as new households are formed from this point forward there will need to be more new construction, whether single”family homes or multi”family dwellings, to meet this new demand. Based upon positive household formations, positive net migration, secondary homes, and natural obsolescence there seems to be demand for roughly 1.5 to 1.6 million home starts annually, which is well above current production levels. Therefore, as new construction activity continues to work its way back from the multi”decade low levels reached in 2009 (539,000) to this long”term need of 1.5 to 1.6 million units annually, our portfolio of companies, which are unique to most global real estate funds, stands to benefit at nearly every stage in the process.

While the Fund has substantial capital invested in companies tied to U.S. housing, investments in U.S. homebuilders are conspicuously missing from the portfolio. We evaluate each company on a case”bycase basis, and, generally speaking, we believe that prices for U.S. homebuilder common stocks already reflect a full recovery (1.5 to 1.6 million home starts). On the other hand, common stocks of companies providing ‘inputs’ to the homebuilding process continue to be attractively valued and have substantial room for improvement as conditions strengthen further. We are taking full advantage of the Fund’s flexible mandate to invest in a broad universe of real estate securities that still offer considerable value both on the residential and commercial side.

At the end of the quarter, the Fund had approximately 35% of net assets invested in commercial real estate companies, most of which control very strategic development pipelines that should prove to be quite valuable as demand for new building returns; approximately 26% of net assets is invested in U.S. residential”related companies as outlined above; nearly 20% of net assets is invested in ‘special situation’ investments such as recapitalizations and M&A candidates; and the remaining 19% is in cash and cash equivalents. The Fund’s cash balance is higher than historical averages, mostly due to recent inflows as well as more mature investments being sold.

Higher than normal cash balances naturally lead to the question about the Fund’s capacity. While we take this issue seriously, there currently are no plans to close the Fund to new investors. As noted in previous quarterly letters, we have historically allowed cash balances to accumulate during periods when securities valuations do not warrant new purchases. Holding ‘dry powder’ and patiently waiting for more reasonable prices has worked for us in the past. Long”term investors in the Fund may recall when the Fund was closed to new investors in 2005. At that time, the Fund’s investable universe was a fraction of what it is today, given the resurgence in the securitization of real estate and the Fund’s flexible mandate which allows us to exploit opportunities in common stocks of traditional real estate companies as well as real estate related companies and real estate debt securities. We estimate the investable universe is now in excess of $3 trillion (excluding debt securities).

We are committed to continuing our efforts of scouring our expansive universe for suitable investments. Our ‘T”2’ portfolio continues to expand as we find interesting companies that we desire to include in the portfolio, but at lower prices. We perform rigorous fundamental analysis on each potential investment, which allows us to quickly deploy into new positions during market dislocations. Previous shareholder letters have highlighted our advance preparation and ability to deploy significant capital in a short period of time. Members of the Fund management team each have significant portions of their investible personal assets in the Fund. We are not willing to compromise returns for the sake of remaining ‘fully invested’ and trust that the vast majority of our fellow shareholders are likeminded. While we pursue a mere handful of suitable investments (we don’t need dozens), we will wait patiently, protect our downside, and then buy with conviction when opportunities appear. We thank you for your continued support and look forward to writing to you again next quarter.

Sincerely,

The Third Avenue Real Estate Value Team

Michael Winer, Co”Lead Portfolio Manager

Jason Wolf, Co”Lead Portfolio Manager

Ryan Dobratz, Portfolio Manager