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Margaret Moran
Margaret Moran
Articles (290) 

Third Avenue's Top 2nd-Quarter Portfolio Updates

Firm keeps its focus on real estate value picks

Third Avenue Management (Trades, Portfolio) recently disclosed its portfolio updates for the second quarter of 2020, which ended on June 30.

Founded in 1986 by Martin J. Whitman, Third Avenue Management (Trades, Portfolio) pursues a deep value investing strategy based on the prices, balance sheets and assets of businesses. It aims to follow the crowds as little as possible, focusing on the long-term values of investments rather than the short-term effects of news reports or investor sentiment.

Based on the above criteria, the firm's top buys for the quarter were for American Homes 4 Rent (NYSE:AMH) and Old Republic International Corp. (NYSE:ORI), while its top sells were for Public Storage (NYSE:PSA) and Lennar Corp. (NYSE:LEN) (NYSE:LEN.B).

American Homes 4 Rent

The firm established a new holding of 402,492 shares in American Homes 4 Rent after selling out of a previous investment in the company in the third quarter of 2014. The trade had a 1.52% impact on the equity portfolio. During the quarter, shares traded for an average price of $24.88.

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American Homes 4 Rent is a California-based REIT that invests in single-family rental homes. It owns more than 50,000 properties in 22 U.S. states, with high concentrations in Georgia and Texas.

On Aug. 14, shares of American Homes traded around $28.10 for a market cap of $8.46 billion and a price-earnings ratio of 100.47. According to the Peter Lynch chart, the stock is trading higher than its intrinsic value but in line with its historical median valuation.

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GuruFocus gives the company a financial strength rating of 4 out of 10 and a profitability rating of 6 out of 10. The cash-debt ratio of 0.01 is lower than 89.20% of competitors, while the Altman Z-Score of 1.75 indicates the company may face danger of bankruptcy. The operating margin of 19.10% and net margin of 10.30% are lower than the industry medians but higher than the company's own 10-year average medians.

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Old Republic International Corp

The firm upped its stake in Old Republic International Corp. by 320,961, or 40.26%, for a total investment of 1,118,129 shares. The trade impacted the equity portfolio by 0.73%. Shares traded for an average price of $15.79 during the quarter.

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Old Republic is an Illinois-based property insurance and title deed company that operates in the U.S and Canada. It is one of the top 50 largest insurance groups in the U.S. and primarily provides liability insurance to companies and mortgage guaranty insurance to home buyers.

On Aug. 14, shares of Old Republic traded around $16.56 for a market cap of $5.03 billion and a price-earnings ratio of 18.26. According to the Peter Lynch chart, the stock is trading higher than its intrinsic value.

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GuruFocus gives the company a financial strength rating of 5 out of 10 and a profitability rating of 5 out of 10. The cash-debt ratio of 0.12 is far below the industry median of 2.15, while the interest coverage ratio of 8.94% is lower than 60.97% of competitors. The return on invested capital (ROIC) has recently surpassed the weighted average cost of capital (WACC), indicating a turn to profitability for shareholders.

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Public Storage

The firm cut its stake in Public Storage by 63,263 shares, reducing the position by 62.31% for a remaining holding of 38,265 shares and impacting the equity portfolio by -1.86%. During the quarter, shares traded for an average price of $193.16.

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Public Storage is a California-based real estate investment trust that runs a chain of self-storage facilities under the same name. It is the largest self-storage company in the U.S.

On Aug. 14, shares of Public Storage traded around $200.24 for a market cap of $35 billion and a price-earnings ratio of 28.73. According to the Peter Lynch chart, the stock is trading higher than its intrinsic value but below its historical median valuation.

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GuruFocus gives the company a financial strength rating of 7 out of 10 and a profitability rating of 8 out of 10. The cash-debt ratio of 0.52 and interest coverage ratio of 26.91% are higher than 88.91% of companies in the REITs industry. The operating margin of 45.93% and net margin of 44.40% are near their industry medians.

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Lennar Corp

The firm sold 265,203 shares, or 43.19%, of its position in Lennar Corp's normal shares and 74,487 shares, or 17.57%, of its position in the company's B class shares. The trades had a combined impact of -2.25% on the equity portfolio. Normal shares traded for an average price of $52.55 during the quarter, while B shares traded for an average price of $39.57.

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Lennar is the second-largest homebuilder in the U.S. Headquartered in Miami, Florida, the company is a national leader in the construction of new homes in what it identifies as the "most desirable" real estate markets. It also has an international arm, which it launched in 2014.

On Aug. 14, shares of Lennar Corp. traded around $75.25 per normal share and $57.70 per B share for market caps of $22.55 billion and $22.64 billion, respectively. Both share classes are trading at a price-earnings ratio of 11, which is below their intrinsic value according to the Peter Lynch chart.

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GuruFocus gives the company a financial strength rating of 5 out of 10 and a profitability rating of 8 out of 10. The cash-debt ratio of 0.27 is below 71.19% of competitors, but the Altman Z-Score of 3.45 indicates the company is unlikely to face bankruptcy in the near future. The three-year revenue growth rate is 14.5% and the earnings per share (EPS) without non-recurring items (NRI) growth rate is 14.1%.

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Portfolio overview

As of the quarter's end, Third Avenue Management (Trades, Portfolio)'s equity portfolio consisted of 65 stocks valued at $714 million. Its top holdings were Five Point Holdings LLC (FPH) with 6.98% of the equity portfolio, Brookfield Asset Management Inc. (BAM) with 6.38% and Weyerhaeuser Co (WY) with 5.45%.

The turnover rate for the quarter was 4%. In terms of sector weighting, the firm was most invested in real estate, followed by consumer cyclical and financial services.

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Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Portfolio updates reflect only common stock positions as per the regulatory filings for the quarter in question and may not include changes made after the quarter ended.

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