Rising home sales is fueling growth for this real estate fund.
Third Avenue Real Estate Value Investor Fund (TVRVX)
from Sound Advice
Third Avenue Real Estate Value Investor Fund (TVRVX) has led the pack of all real estate mutual funds during the last three years. It is replete with stellar values substantially below NAV with strong growth prospects.
During the third quarter, TVRVX sold five positions that management concluded became overvalued and invested the proceeds into companies tied to the US residential markets, including some existing holdings and two new positions. One new position was in Realogy, the preeminent and most integrated provider of residential real estate services in the US. The stock declined 20% and gave TVRVX an attractive buying opportunity.
With home sales at an all-time low as a percentage of inventory, the embedded earnings power is substantial. The company also has a $2.1 billion tax loss carry-forward that will minimize future taxes and increase cash flow.
The other new position was in Zions, a bank holding company with eight banks controlling $45 billion of deposits in the Western region of the US. Zions has been trading at a discount to its peers and its book value because it had a significant share of its capital invested in collateralized debt obligations (CDOs), which caused Zions to fail a Federal Reserve stress test. However, Zions has reduced the CDO portfolio and completed a $550 equity offering, which has enabled Zions to pass the Fed’s stress test. Zions is once again considered to be a well-capitalized bank with good growth prospects and a desirable acquisition candidate for a larger bank.
As an example of management’s attention to value, the Fund’s position was increased in Westfield common stock during the quarter, ahead of the spin-off of its Australian portfolio of world-class malls into an Australian REIT. TVRVX elected to sell the REIT because its price exceeded its NAV.
However, the position in Westfield common was retained because it has an opportunity to substantially increase its NAV as it delivers major development and expansion projects, including the retail mall at the World Trade Center site in New York City, as well as the expansion of the Westfield Mall in West London, a development in Milan, and the continued development of the Century City sub-market of Los Angeles.
TVRVX also increased its holding of Cheung Kong common stock, a Hong Kong-based holding company with substantial real estate investments. Cheung Kong has transformed its business model by selling down exposure to yield-oriented assets in Asia and reinvesting proceeds into real assets in Europe on an opportunistic basis.
Gray Cardiff, Sound Advice, www.soundadvice-newsletter.com, 800-825-7007, October 2, 2014