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THIRD AVENUE VALUE FUND
THIRD AVENUE SMALL-CAP VALUE FUND
THIRD AVENUE HIGH YIELD FUND
THIRD AVENUE REAL ESTATE VALUE FUND
FIRST QUARTER REPORT
(Unaudited)
---------------
January 31, 1999
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Dear Fellow Shareholders:
At January 31, 1999, the unaudited net asset value attributable to the
48,724,419 common shares outstanding of the Third Avenue Value Fund ("TAVF",
"Third Avenue" or the "Fund") was $33.18 per share. This compares with an
audited net asset value of $29.76 per share at October 31, 1998, and an
unaudited net asset value at January 31, 1998 of $31.10 per share, both as
adjusted for subsequent distributions to shareholders. At February 19, 1999 the
unaudited net asset value was $30.95 per share.
QUARTERLY ACTIVITY
During the first quarter of fiscal 1999, TAVF established new positions
in four securities; increased its positions in twelve securities; reduced its
holdings of one security; and eliminated its positions in three securities. Also
as a result of a merger, 450,000 shares of SunAmerica Common Stock were
exchanged by the Fund for 384,750 shares of American International Group Common
Stock. Eleven of the positions acquired during the quarter were either
relatively small or were discussed in previous shareholder letters. They are not
discussed further in this letter. These positions are CNY Common, Insurance
Partners LP, Analogic Common, AVX Common, Capital Re Common, Electroglas Common,
Glenayre Common, Head Insurance LP, Koger Equity Common, Protocol Common and
Risk Capital Common.
Cash, asset-backed and U.S. Government Agency holdings were reduced during the
quarter from $168 million to $39.6 million. A principal factor involved in the
reduction in cash equivalents was the net redemption by shareholders of
approximately 2.3 million shares of TAVF Common Stock.
PRINCIPAL AMOUNT
OR
NUMBER OF SHARES NEW POSITIONS ACQUIRED
$190,000 Insurance Partners II Equity Fund, LP
("Insurance Partners LP")
250,000 shares Alamo Group, Inc. Common Stock
("Alamo Common")
39,500 shares CNY Financial Corp. Common Stock
("CNY Common")
126,605,679 shares Repap Enterprises Inc. Common Stock
("Repap Common")
Increases in Existing Positions
$1,864,000 Head Insurance Investors LP
("Head Insurance LP")
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1
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PRINCIPAL AMOUNT
OR
NUMBER OF SHARES INCREASES IN EXISTING POSITIONS
$29,409,000 PhyMatrix Corp.
6.75% Subordinated Convertibles due 6/15/03
("PhyMatrix Subordinates")
48,000 shares AVX Corp. Common Stock
("AVX Common")
100,000 shares Glenayre Technologies, Inc. Common Stock
("Glenayre Common")
690,000 shares Imperial Credit Commercial Mortgage Investment Corp.
Common Stock ("Imperial Common")
100,000 shares Koger Equity, Inc. Common Stock
("Koger Common")
1,000 shares Protocol Systems, Inc. Common
("Protocol Common")
1,600 shares Risk Capital Holdings, Inc. Common Stock
("Risk Capital Common")
954,000 shares The Chiyoda Fire & Marine Insurance Co., Ltd.
Common Stock ("Chiyoda Common")
REDUCTIONS IN EXISTING POSITIONS
152,200 shares ValueVision International, Inc. Class A Common Stock
("ValueVision Common")
POSITIONS ELIMINATED
$1,128,123 Thousand Trails, Inc. PIK Notes
("Thousand Trails PIKs")
44,000 shares Central Sprinkler Corp. Common Stock
("Central Sprinkler Common")
110,500 shares H.B. Fuller Co. Common Stock
("H.B. Fuller Common")
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2
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Five of the positions acquired during the quarter seem quite important for the
Fund, either presently or potentially. In any event, explanations of the reasons
for the investments by TAVF ought to be helpful to Third Avenue shareholders
interested in ascertaining why the Fund does what it does. These five positions
are Alamo Common, Repap Common, PhyMatrix Subordinates, Imperial Common and
Chiyoda Common.
ALAMO COMMON
Alamo Group is a leading manufacturer of high quality, tractor-mounted mowing
and other vegetation maintenance equipment. For the nine months ended September
30, 1998, 49% of sales were identified as U.S. agriculture; 30% was industrial,
mostly highway maintenance equipment; and the remainder of sales came from
Europe which was supplied by Alamo's United Kingdom operations. The company is
reasonably well financed. At TAVF's cost of around $12 per share, the Fund has
acquired its interest in Alamo Common at around net asset value, and at around
10 times average annual earnings of the past five years. Current results are
depressed because of the downturn in agriculture.
Alamo Group has entered into a contract with a firm specializing in Leveraged
Buyouts ("LBOs") to sell out in a cash merger at a price that would realize for
Alamo Common $18.50 per share. The LBO buyer is attempting to walk away from the
merger deal which has a "drop-dead" date of March 31, 1999. It is uncertain
whether the LBO buyer will be able to walk away free of all liabilities. If the
merger does not close, the long-term prospects for Alamo Common seem reasonably
good, especially since federal and state expenditures for highways seem likely
to increase. Even if the merger does not close, Alamo Group probably is in
"play"; and ought to be an attractive acquisition for others, both strategic
buyers and financial buyers, at prices that would reflect substantial premiums
over current market prices for Alamo Common.
REPAP COMMON
The analysis of Repap Enterprises, 19% of whose common stock was acquired by
TAVF and Third Avenue Small-Cap Value Fund (the "Funds") for a total
consideration of a little less than U.S. $7.4 million, is that the Funds have
acquired a perpetual out-of-the money option with a huge appreciation potential.
Put otherwise, the Funds are involved with the equivalent of an LBO of Repap
Enterprises. Typically, in an LBO where, as is the case here, maximum amounts of
corporate borrowings are used, the common stock is faced with a two to four year
"window of vulnerability" until corporate indebtedness is paid down. If nothing
goes wrong, the rewards to common shareholders tend to be huge. In the case of
Repap Enterprises, such rewards would come from either increases in cash flows
available for Repap Common, or the acquisition of Repap Enterprises by another
paper company, or both.
Repap Enterprises, a Canadian corporation, operates a highly efficient,
low-cost, coated paper mill in New Brunswick, Canada. Repap Enterprises enjoys a
9% share of the North American coated paper market, and an even larger share of
the more desirable light coated paper market. Top management, in office only
since mid 1997, seems truly first rate. But Repap Enterprises has too much
debt-over U.S. $700 million. If I had to predict a precipitant cause for
something to go wrong with the Funds' Repap investment during the next few
years' "window of vulnerability", it would be that coated paper prices might
decline materially from current depressed levels.
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3
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As strictly passive investors, the Funds never would have acquired the common
stock of a company as poorly financed as Repap Enterprises is, no matter how
cheap the price of Repap Common. Repap Common is not safe from an investment
risk point of view. But the Funds are not to be wholly passive in regard to
Repap Enterprises. Management believes that the Funds' management might be
helpful advisers in connection with the long term rationalization of the Repap
Enterprises' capital structure. Curtis Jensen, the co-Manager of Third Avenue
Small-Cap Value Fund, has been asked to become a Director of Repap Enterprises.
The investment in Repap Common is a relatively small one, dollar-wise. The
rewards, though, might be huge, if Repap Common can survive relatively undiluted
during the "window of vulnerability" period.
PHYMATRIX SUBORDINATES
TAVF has acquired a 30.6% interest in PhyMatrix Subordinates at an average price
of 50.54% of principal amount. The indicated yield-to-maturity is 26.7%; the
current yield is 13.4%. It seems likely that the PhyMatrix Subordinates will
remain performing loans through maturity, June 15, 2003. All indications are
that this $100 million issue is currently well protected on a balance sheet
basis. At this writing, there is only $9 million of bank debt in front of the
PhyMatrix Subordinates, and management intends to retire that bank debt shortly.
The best current evidence is that PhyMatrix will dispose of its discontinued
operations, i.e., its Physician Practice Management ("PPM") businesses, at
prices that will not be too great a discount from the $123 million carrying
value for these discontinued operations as of October 31, 1998. At that date,
the equity cushion, or net assets junior to the PhyMatrix Subordinates, amounted
to $183 million on a book basis.
PhyMatrix, under new operating management, seeks to redeploy its assets from PPM
into Site Management Organizations ("SMOs"). As an SMO operator, PhyMatrix hopes
to become a significant industry factor in pharmaceutical contract research,
specifically clinical trials site management and outcomes research; and also to
manage physicians' networks.
As a purely passive investment, PhyMatrix Subordinates seem to be somewhat
speculative. The issue contains little in the way of covenant protections; the
liquidation of the PPM businesses probably has to have a cash value related to
the $123 million carrying value; the investments in SMOs have to create earning
power for the company; and management can dissipate assets by making
distributions to the holders of PhyMatrix Common Stock ("PhyMatrix Common").
Management keeps making statements about buying in PhyMatrix Common at current
depressed prices, a practice that could be harmful to PhyMatrix Subordinates.
Management has not focused on the obvious; i.e., from the points of view of the
Company itself, and long term holders of PhyMatrix Common, if PhyMatrix is to
make distributions to junior security holders, it is probably much more
judicious to make those distributions by buying in PhyMatrix Subordinates rather
than buying in PhyMatrix Common, especially if PhyMatrix can avoid the payment
of income taxes on cancellation of indebtedness income. (The sale of the PPM
businesses ought to create losses for tax purposes).
While I think the PhyMatrix Subordinates are likely to remain performing loans
over their life, TAVF has to be prepared to defend its interests if the
PhyMatrix Subordinates become non-performing loans, or if management seeks to
restructure the capitalization either out of court or in Chapter 11.
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4
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Insiders are large shareholders of PhyMatrix. On December 30, 1998, the Chairman
of the Board owned 25.8% of the outstanding PhyMatrix Common. Assuming that the
insiders want to preserve any value for PhyMatrix Common, then having a large
percentage ownership of the PhyMatrix Subordinates makes the issue far less
speculative for TAVF than would otherwise be the case.
The simple arithmetic of the PhyMatrix situation seems to be about as follows:
1) No holder of PhyMatrix Subordinates, including TAVF, can be forced to
give up rights to money payments for interest and principal when due (after a
short grace period) outside of having the Company seek Bankruptcy Act relief,
unless that individual holder of PhyMatrix Subordinates consents to give up
rights to a money payment.
2) 25%, or more, of the PhyMatrix Subordinates have standing to get the
Indenture Trustee to take certain actions, especially in regard to events of
default.
3) If PhyMatrix were to file for Chapter 11 Relief, no Plan of
Reorganization ("POR") which preserves value for PhyMatrix Common is likely to
be approved without the affirmative vote of holders owning 2/3 in amount among
PhyMatrix Subordinate holders who vote on a POR. Put otherwise, holders of 1/3
of the PhyMatrix Subordinates will have a veto over a POR which preserves value
for PhyMatrix Common.
4) An affirmative vote of 50% of the PhyMatrix Subordinates outstanding
would be required to amend the PhyMatrix Indenture for relevant covenants other
than money covenants. The Fund might be in a blocking position by withholding
consents for covenant changes it did not like, or TAVF might encourage a
solicitation seeking the revocation of consents.
IMPERIAL COMMON
In the TAVF view of the economy, there are always industries that are facing
ultra depressed business conditions. The difference between the 1990's and the
1930's is not that industry-wide depressions do not occur regularly, but rather
that in the 1990's, the depressions are relatively contained without domino
effects. U.S. industries that are currently severely depressed include energy,
agriculture, agriculture equipment, semiconductor equipment manufacturers, steel
and mortgage-backed securities, especially those below investment grade. These
depressions tend to result in the creation of attractive investment
opportunities where common stocks can be acquired "cheap" and also "safe,"
provided the companies involved are well financed so that they enjoy
unquestioned staying power, the depressed state of the industry notwithstanding.
Investments along these lines by TAVF have included banks and real estate common
stocks in the early 1990's, title insurance commons in 1993, broker-dealer
commons in 1994, and California land interests in 1997. The Fund expanded its
position in Imperial Common during the quarter. Imperial is a mortgage Real
Estate Investment Trust ("REIT"). The Fund acquired Imperial Common on a basis
where the discount from net asset value is around 40% and the indicated dividend
return is around 15%. Other mortgage REITs seem available on an even more
attractive statistical basis, but Imperial seems far and away to be the highest
quality issue based both on the composition of its assets and its conservative
capitalization.
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5
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CHIYODA COMMON
The February 1-7 edition of "The Asian Wall Street Journal" carried this
headline, "Toyota Aims for M&A at Home-First Strategy Is To Consolidate Loose
Alliance of Japanese Affiliates". This newspaper article seems to confirm what
members of Toyota Motor Corp ("Toyota") management have been saying in various
public forums.
During the quarter, the Fund acquired Chiyoda Common at prices between 360 yen
and 380 yen. Chiyoda is a high quality Japanese non-life insurer. Last fall
Toyota increased its holdings in Chiyoda Common from a 37% interest to a 47%
interest by acquiring Chiyoda Common at 500 yen, the then market price. Toyota
indicated in a letter to us that in an M&A context it might have paid a
different, and presumably higher, price than 500 yen. The net asset value
attributable to Chiyoda Common is well in excess of 800 yen based on market
prices for its securities portfolio after deducting deferred taxes on unrealized
appreciation. Pre deferred taxes the net asset value exceeds 1,000 yen.
Toyoda Automatic Loom Works Common ("Toyoda Common") is the common stock of
another Toyota affiliate which is owned by TAVF. The Fund's cost basis for its
holdings of Toyoda Common is U.S. $17.12 per share. In an M&A context, a
conservative valuation for Toyoda Common would be U.S. $25 to U.S. $30 per
share.
Chiyoda Common and Toyoda Common look very much like pre-arbitrage deals. I
would feel better about each investment had the corporations been incorporated
in Delaware rather than Japan. But it seems likely that Toyota, a super-rich
international company, is conscious of a need to be fair. If so, both Chiyoda
Common and Toyoda Common ought to work out at substantial premiums over current
market prices.
THE SELL SIDE
ValueVision traded briefly as if it were an internet common stock. We used that
opportunity to sell whatever of our small position we could at those prices.
Thousand Trails PIKs were called. In the cases of Central Sprinkler common and
H.B. Fuller Common, I was worried that the businesses might be vulnerable to
permanent impairments of capital.
INDEX FUNDS AND THE GENERAL MARKET
In terms of my own money, I have invested rather heavily in TAVF because I am
enthusiastic about the underlying long term values represented in the Fund's
portfolio. On the other hand, the general market scares me because of the lack
of sound, underlying values. This view of mine is reflected in a recent article
I wrote. A portion of that article is reprinted here. Any stockholders wanting
the complete article ought to write to us to request a copy of the article, or
download it from the TAVF website: www.thirdavenuefunds.com.
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6
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INDEX FUNDS SEEM UNUSUALLY DANGEROUS FROM A LONG TERM POINT OF VIEW
The appreciation in market prices for the common stocks that make up the leading
indexes have, in recent years, so far outstripped the growth in book value and
earnings for the companies whose common stocks make up the indexes that these
market prices seem now to be grossly out of line with corporate reality. Thus
the possibilities for disaster. Here excellent past performance seems likely to
be a harbinger of future under-performance insofar as one believes that over the
long term, market prices for passively owned common stocks will have a
relationship to underlying corporate fundamentals.
The managers of Third Avenue Funds do not predict the future but rather deal in
probabilities. Probabilities are driven by securities prices as they relate to
underlying corporate realities. It is our strong belief that the higher the
current market prices relative to corporate fundamentals, the greater the
investment risk; and the lower current market prices are relative to corporate
fundamentals, the less the investment risk. We also believe that for an index,
or almost any general aggregate for that matter, corporate fundamentals can be
measured by accounting earnings and accounting net asset value per share, i.e.
book value.
A principal reason why Third Avenue Fund deals in probabilities rather than in
predictions is that predictions are so difficult to make. To predict that the
prices represented by the S&P 500 Index will crater at a specific time, one has
to visualize what the precipitant for such a scenario might be and when that
catastrophic event might occur. Third Avenue is not very good at foreseeing
precipitants, especially if timing is involved, and we doubt anyone else is much
good at it either. Who could really have forecast the timing of the Asian
collapse in 1997? Who could really have forecast the timing of sovereign
defaults in Russia in 1998, the Mexican Peso devaluation in 1994, the US.
Savings and Loan debacle in the mid-to-late 1980's, or the plunge in oil prices
in 1982 and again in 1998?
The Third Avenue Funds use a balanced approach to analysis, initially measuring
the quality of resources in a business as well as the quantity of resources
acquired relative to market prices.
Quality and quantity of resources translate into return on equity. In using
financial accounting as a tool to analyze individual companies, no particular
number is emphasized by Third Avenue, but rather each accounting number is a
function of, modified by, and derived from, all other accounting numbers. Thus
book value is intimately related to earnings, and vice versa. Both are joined at
the hip so to speak, in the concept of return on equity, or ROE. R is the
earnings figure; E is the book value figure.
Financial accounting in the analysis of individual companies is always subject
to adjustment. The most GAAP figures can represent in the analysis of an
individual company are objective benchmarks which the analyst uses as a tool to
reach opinions about economic reality, either in terms of flows, whether cash or
earnings; or asset values, or both. However, financial accounting in the
aggregate tends to be highly meaningful. It measures changes over time, the
amount of resources in existence and flows, whether cash or earnings. For the
aggregates, statistical errors that might exist for individual companies tend to
even out.
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7
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THE STATISTICAL CASE DEMONSTRATING THAT PRICES FOR THE
S&P 500 INDUSTRIAL HAVE OUTRUN CORPORATE REALITY
MARKET PRICE AS A
MULTIPLE OF EARNINGS
PERIOD BOOK VALUE PE RATIO BOOK VALUE PER SHARE ROE*
- ------ ------------- -------- --------- -------- -------
12/31/98 6.5x 32.3x $188.11 $38.09 20.0%
12/31/97 5.1 18.6 190.12 39.72 21.8
12/31/95 3.5 18.3 174.33 33.60 22.2
12/31/90 2.2 19.2 153.01 21.73 14.8
12/31/87 1.8 14.1 126.82 17.50 13.8
12/31/82 1.3 11.1 112.46 12.64 11.6
*EPS for the year divided by book value at the end of the prior year
The significance of superlative past performance can be attributed to one of
three factors. First, in the case of actively managed funds, it can be evidence
of superior skills being brought into play by an active manager. Second, in the
case of either actively managed funds or index funds, it can be evidence of
superlative growth in underlying corporate fundamentals which growth is
reflected in common stock prices. Third, in the case of either actively managed
funds or index funds, it can be evidence that increases in common stock prices
have outpaced increases in underlying corporate values. The third alternative
seems to be the root cause for the excellent performance of the S&P 500 in
recent years as is shown in the following table covering growth rates in market
prices relative to growth rates in earnings and book values:
COMPOUND ANNUAL
GROWTH RATES FOR THE S&P 500
MARKET PRICES EPS BOOK VALUE
----------- ------ --------
1990-1998 17.9% 7.3% 2.6%
1982-1998 14.5 7.1 3.3
AT 6X BOOK VALUE FOR THE S&P 500 IT IS HARD TO MAKE THE NUMBERS WORK
It is hard to justify a 6x multiple of book unless one can postulate that either
ROE for the index companies will increase to a number greater than 25%, or that
companies in general will be able to issue massive new amounts of common stocks,
either for cash or in a merger and acquisition transactions, at prices related
to 6x book.
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8
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From 1982 through 1998, ROE's for the S&P 500 ranged from a high of 22.2% in
1996 to a low of 10.6% in 1991. The average ROE for the 17 year period was
15.7%. However, for the 5 years through 1998, the average ROE was 21.0% and in
no year was it below 20.0%.
Assuming a market price of 6X Book, PE ratios are as follows based on various
ROEs:
MARKET PRICE BOOK ROE EPS PE RATIO
------------ ----- ----- ----- --------
$6 $1 25% 25(cent) 24.0x
6 1 20 20 cent) 30.0
6 1 15 15 cent) 40.0
6 1 11 11 cent) 54.5
The 6x book value might well be justifiable assuming companies in the S&P 500
could increase their numbers of shares outstanding by 31.5% via the issuance of
new shares at 5.25x book. In that instance book value would increase to $2.02
and EPS per share and PE ratios would be as follows at various ROEs:
MARKET PRICE BOOK ROE EPS PE RATIO
------------ ----- ----- ----- --------
$6 $2.02 25% 51(cent) 11.8x
6 2.02 20 40(cent) 15.0
6 2.02 15 30(cent) 20.0
6 2.02 11 22(cent) 27.3
It seems unrealistic to suppose that on average the companies making up the S&P
500 would have such attractive access to capital markets that such a large
amount of new equity capital could be raised at those prices. Alternatively, it
seems questionable that companies in the aggregate would be able to maintain
existing ROEs if massive new amounts of capital were injected into their
businesses.
It is always possible that securities pricing for the common stocks that make up
the S&P 500 have entered into a new era where greater capitalization rates will
be given to earnings, and greater premiums will be assigned to book values, than
historically has been the case. These enhanced valuations might persist, or even
be improved upon, on a permanent or semi-permanent basis. Such a new era pricing
scenario seems to be a possibility rather than a probability.
In contrast to this statistical picture for the S&P 500, many common stocks,
especially well-capitalized small caps, currently seem to be priced at bargain
prices relative to long term earnings prospects and current book values. This
type of pricing in markets for passive, minority investments seems to occur
frequently at times when the immediate earnings outlooks are poor. The
semi-conductor equipment stocks Third Avenue Funds are currently acquiring seem
to meet these
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9
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[GRAPHIC OMITTED]
criteria. As a long term investor, Third Avenue is betting that the
probabilities are for most of these companies that the next peak in earnings
will be well in excess of historic peaks. Relevant statistics for these issues
are as follows:
<TABLE>
<CAPTION>
PE Ratio Based on
Current Price
PRICE CASH/TOTAL MARKET PRICE AS A MULTIPLE OF TO PAST PEAK
ISSUER 12/31/98 LIABILITIES% BOOK VALUE EARNINGS
- ------ -------- ------------ ----------------------------- -----------------
<S> <C> <C> <C> <C>
ADE Corp. $13 297% 1.3x 8.8x
AVX Corp. 17 53 1.9 10.8
C.P Clare Corp. 5 26 0.6 5.3
Electroglas, Inc. 12 523 1.3 5.9
FSI Int'l., Inc. 10 85 1.1 8.1
Silicon Valley Grp., Inc. 13 89 0.8 6.3
SpeedFam Int'l., Inc. 17 471 1.0 10.2
</TABLE>
We recommend to investors that they switch holdings in the S&P 500 to Third
Avenue Funds or other funds that concentrate on Value Investing. Value
investors, by definition, are conscious of the relationship of securities prices
to corporate fundamentals. In value investing, asset allocation is driven more
by price considerations and less by predicting outlooks.
I will write you again when the Semi-Annual Report is published.
Sincerely yours,
/s/ Martin J. Whitman
- ----------------------
Martin J. Whitman
Chairman of the Board
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS
AT JANUARY 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL % OF
AMOUNT ($) ISSUES VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSET BACKED SECURITIES - 0.73%
4,516,467 Ford Credit Auto Owner Trust
Series 1997-B Class A-2, Subordinated Bond,
5.95% due 1/15/00 $ 4,521,368
4,797,022 Residential Funding Mortgage Securities Co., Inc.
Series 1996-S9 Class A-12, 7.25% due 4/25/26 4,832,064
2,102,103 The Money Store Home Equity Trust
Series 1992-A Class A, 6.95% due 1/15/07 2,099,212
301,093 The Money Store Home Equity Trust
Series 1995-B Class A-3, 6.65% due 1/15/16 300,775
-----------
TOTAL ASSET BACKED SECURITIES
(Cost $11,757,293) 11,753,419 0.73%
-----------
- ----------------------------------------------------------------------------------------------------------------
BANK AND OTHER DEBT - 0.45%
Oil Services 1,400,740 Cimarron Petroleum Corp. (c) (d) 1,419,965 0.09%
Retail -----------
295,370 Lechmere, Inc. Trade Claim (a) (c) 0
13,000,000 Montgomery Ward Series I 8.37%, 7/15/02 (a) (c) * 1,300,000
8,571,364 Montgomery Ward Series C 9.24%, 3/15/03 (a) (c) * 857,136
10,000,000 Montgomery Ward Series F 9.81%, 3/15/03 (a) (c) * 1,000,000
26,606,561 Montgomery Ward Trade Claim (a) (c) 2,660,656
-----------
5,817,792 0.36%
-----------
TOTAL BANK AND OTHER DEBT
(Cost $22,574,444) 7,237,757
-----------
- ----------------------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS - 1.70%
Lasers - Systems / 15,000,000 Cymer, Inc. 3.5%, due 8/6/04 13,275,000 0.82%
Components -----------
Medical Management 30,537,000 PhyMatrix Corp. 6.75%, due 6/15/03 14,161,534 0.88%
Services -----------
TOTAL CONVERTIBLE BONDS
(Cost $24,577,959) 27,436,534
-----------
</TABLE>
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JANUARY 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL % OF
AMOUNT ($) ISSUES VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CORPORATE BONDS - 0.40%
Bermuda Based 6,428,575 CGA Special Account Trust (b) (c) $ 6,428,575 0.40%
Financial Institutions -----------
TOTAL CORPORATE BONDS
(Cost $6,428,575) 6,428,575
-----------
- -----------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AGENCY BONDS (COLLATERALIZED MORTGAGE OBLIGATIONS) - 1.29%
Planned Amortization 17,907,101 Fannie Mae
Classes Series 1998-16 PA, 6.00% due 4/18/09 17,949,630
2,927,006 Fannie Mae
Series G92-65 E, 6.50% due 12/25/16 2,922,777
-----------
TOTAL GOVERNMENT AGENCY BONDS
(Cost $20,848,195) 20,872,407 1.29%
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND WARRANTS - 93.02%
Annuities & Mutual Fund 163,300 John Nuveen & Co., Inc. Class A 6,113,544
Management & Sales 508,000 Liberty Financial Companies, Inc. 12,763,500
-----------
18,877,044 1.17%
-----------
Apparel Manufacturers 150,000 Kleinerts, Inc. (a) (c) 2,700,000 0.17%
-----------
Bermuda Based 838,710 CGA Group, Ltd. (a) (b) (c) 0
Financial Institutions 91,999 Cobalt Holdings, LLC (c) 920
118,449 ESG Re, Ltd. (a) 2,102,470
85,917 LaSalle Re Holdings, Ltd. 1,589,464
912,442 St. George Holdings, Ltd. Class A (a) (b) (c) 91,244
7,549 St. George Holdings, Ltd. Class B (a) (b) (c) 755
-----------
3,784,853 0.23%
-----------
Building Products 250,000 Cummins Engine Co., Inc. 9,500,000
& Related 125,400 Tecumseh Products Co. Class A (b) 5,603,813
417,300 Tecumseh Products Co. Class B (b) 18,309,037
-----------
33,412,850 2.07%
-----------
</TABLE>
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12
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JANUARY 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
% OF
SHARES ISSUES VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONTINUED)
Business Development 72,445 Capital Southwest Corp. $ 6,302,715 0.39%
Companies -----------
Computers, Networks 800,000 3Com Corp. (a) 37,600,000
& Software 365,000 Electronics for Imaging, Inc. (a) 13,140,000
391,200 NCR Corp. (a) 19,071,000
100,000 Novell, Inc. (a) 2,037,500
-----------
71,848,500 4.44%
-----------
Depository Institutions 53,000 Astoria Financial Corp. 2,424,750
123,237 BankAtlantic Bancorp, Inc. Class A 1,070,621
147,034 Bankers Trust New York Corp. 12,791,958
218,500 Carver Bancorp, Inc. (b) 1,679,719
39,500 CNY Financial Corp. 429,562
61,543 Commercial Federal Corp. 1,407,796
197,307 Golden State Bancorp., Inc. (a) 3,687,175
53,480 Golden State Bancorp., Inc. Warrants, 9/17/00 (a) 608,335
197,307 Golden State Bancorp, Inc. Litigation
Tracking Warrants (a) 832,379
60,000 Letchworth Independent Bancshares Corp. 930,000
155,952 Marshall & Ilsley Corp. 9,240,156
69,566 Peoples Heritage Financial Group, Inc. 1,252,188
-----------
36,354,639 2.25%
-----------
Financial Insurance 200,000 Ambac Financial Group, Inc. 11,962,500
133,900 Capital Re Corp. 2,435,306
608,500 Enhance Financial Services Group, Inc. 15,212,500
1,000,000 Financial Security Assurance Holdings, Ltd. 54,937,500
394,673 MBIA Inc. 25,875,749
-----------
110,423,555 6.83%
-----------
</TABLE>
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13
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JANUARY 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
% OF
SHARES ISSUES VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMMON STOCKS AND WARRANTS (CONTINUED)
Financial Services 26,208 Associates First Capital Corp. Class A $ 1,063,062 0.07%
-----------
Food Manufacturers 328,000 J & J Snack Foods Corp. (a) 7,954,000
& Purveyors 95,000 Premark International, Inc. 3,253,750
172,200 Sbarro, Inc. 4,617,113
109,100 Weis Markets, Inc. 4,159,437
-----------
19,984,300 1.24%
-----------
Holding Companies 50,000 Aristotle Corp. (a) 353,125 0.02%
-----------
Industrial Equipment 250,000 Alamo Group, Inc. 3,000,000 0.19%
-----------
Industrial - Japan 2,200,000 Toyoda Automatic Loom Works, Ltd. 38,596,468 2.39%
-----------
Insurance Holding 200,678 ACMAT Corp. Class A (a) (b) 3,097,967
Companies 384,750 American International Group, Inc. 39,605,203
803,669 Danielson Holding Corp. (a) (b) (c) 3,616,510
50,000 Fund American Enterprises Holdings, Inc. 7,287,500
648,200 Leucadia National Corp. 19,446,000
438,300 Risk Capital Holdings, Inc. (a) 8,985,150
5,490 Sen-Tech International Holdings, Inc. (a) (c) 2,745,000
-----------
84,783,330 5.24%
-----------
Life Insurance 434,536 Reliastar Financial Corp. 18,006,086 1.11%
-----------
Manufactured Housing 89,000 Liberty Homes, Inc. Class A 901,125
40,000 Liberty Homes, Inc. Class B 477,500
16,875 Palm Harbor Homes, Inc. (a) 477,773
-----------
1,856,398 0.11%
-----------
Media 124,400 ValueVision International, Inc. Class A (a) 1,150,700 0.07%
-----------
Medical Supplies 81,400 Acuson Corp. (a) 1,088,725
& Services 135,500 Analogic Corp. 5,403,063
342,300 Datascope Corp. (a) 6,974,362
1,125,000 Hologic, Inc. (a) 14,484,375
</TABLE>
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14
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JANUARY 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
% OF
SHARES ISSUES VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONTINUED)
Medical Supplies 167,429 Medtronic, Inc. $ 13,341,998
& Services (continued) 913,900 Protocol Systems, Inc. (a) (b) 6,854,250
90,750 St. Jude Medical, Inc. (a) 2,365,172
-----------
50,511,945 3.12%
-----------
Membership Sports & 237,267 Thousand Trails, Inc. (a) 1,171,506 0.07%
Recreation Clubs -----------
Mortgage Insurance 152,800 CMAC Investment Corp. 6,704,100 0.41%
-----------
Motor Vehicles & 50,000 Ford Motor Co. 3,071,875 0.19%
Cars' Bodies -----------
Natural Resources & 1,160,000 Alexander & Baldwin, Inc. 23,453,692
Real Estate 474,300 Avatar Holdings, Inc. (a) (b) 9,130,275
179,600 Catellus Development Corp. (a) 2,761,350
31,000 Consolidated-Tomoka Land Co. 449,500
550,000 Forest City Enterprises, Inc. Class A 13,921,875
7,500 Forest City Enterprises, Inc. Class B 189,844
955,000 Imperial Credit Commercial Mortgage
Investment Corp. 9,132,187
1,180,336 Koger Equity, Inc. 18,000,124
14,600 LNR Property Corp. 312,075
846 Public Storage, Inc. 21,520
238,200 St. Joe Co. 5,299,950
3,045,508 Tejon Ranch Co. (b) (c) 52,776,857
-----------
135,449,249 8.38%
-----------
Non-Life
Insurance-Japan 7,319,000 Mitsui Marine & Fire Insurance Co., Ltd. 37,765,715
6,056,000 The Chiyoda Fire & Marine Insurance Co., Ltd. 20,155,406
5,316,000 The Nissan Fire & Marine Insurance Co., Ltd. 14,172,334
3,246,000 The Sumitomo Marine & Fire Insurance Co., Ltd. (a) 19,205,768
</TABLE>
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15
<PAGE>
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[GRAPHIC OMITTED]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JANUARY 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
% OF
SHARES ISSUES VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONTINUED)
Non-Life 1,020,800 The Tokio Marine & Fire Insurance Co., Ltd.,
Insurance-Japan Sponsored ADR $ 58,185,600
(continued) 3,000,000 The Yasuda Fire & Marine Insurance Co., Ltd. 15,273,469
-----------
164,758,292 10.19%
-----------
Oil Services 1,875,000 Nabors Industries, Inc. (a) 23,437,500 1.45%
-----------
Paper & 126,605,679 Repap Enterprises Inc. (a) (b) 10,128,454 0.63%
Related Products -----------
Security Brokers, 223,600 Jefferies Group, Inc. 11,725,025
Dealers & 893,332 Legg Mason, Inc. 26,576,627
Flotation Companies 1,181,250 Raymond James Financial, Inc. 22,517,578
-----------
60,819,230 3.76%
-----------
Semiconductor 728,900 ADE Corp. (a) (b) 10,432,381
Equipment Manufacturers 25,000 AG Associates, Inc. (a) 132,813
and Related 400,000 Applied Materials, Inc. (a) 25,275,000
1,748,000 AVX Corp. 27,094,000
1,004,500 C.P. Clare Corp. (a) (b) 6,654,812
1,600,300 Electro Scientific Industries, Inc. (a) (b) 66,212,412
1,882,500 Electroglas, Inc. (a) (b) 31,531,875
2,820,900 FSI International, Inc. (a) (b) 39,316,294
631,700 GaSonics International Corp. (a) 7,738,325
369,200 KLA-Tencor Corp. (a) 21,321,300
376,400 Lam Research Corp. (a) 14,444,350
300,000 Photronics, Inc. (a) 7,725,000
4,234,800 Silicon Valley Group, Inc. (a) (b) 69,609,525
1,605,000 SpeedFam International, Inc. (a) (b) 33,504,375
663,200 Veeco Instruments, Inc. (a) (b) 36,393,100
262,500 Zygo Corp. (a) 2,887,500
-----------
400,273,062 24.76%
-----------
</TABLE>
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16
<PAGE>
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[GRAPHIC OMITTED]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JANUARY 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
% OF
SHARES ISSUES VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONTINUED)
Small-Cap Technology 108,750 AFC Cable Systems, Inc. (a) $ 3,833,438
1,109,900 American Physicians Service Group, Inc. (a) (b) 5,549,500
455,400 Boston Communications Group, Inc. (a) 4,497,075
230,000 Evans & Sutherland Computer Corp. (a) 3,895,625
81,500 FDP Corp. 1,242,875
1,924,200 Glenayre Technologies, Inc. (a) 9,621,000
299,000 Hypercom Corp. (a) 3,830,938
140,600 H & Q Life Sciences Investors 1,775,075
154,800 Integrated Systems, Inc. (a) 2,012,400
300,000 Interphase Corp. (a) (b) 2,400,000
412,200 Planar Systems, Inc. (a) 3,787,088
53,600 Sparton Corp. (a) 398,650
612,000 Texas Micro, Inc. (a) 2,983,500
306,900 Vertex Communications Corp. (a) (b) 5,370,750
-------------
51,197,914 3.17%
-------------
Title Insurance 3,000,000 First American Financial Corp. (b) 91,687,500
975,700 Stewart Information Services Corp. (b) 52,199,950
-------------
143,887,450 8.90%
-------------
TOTAL COMMON STOCKS AND WARRANTS
(Cost $1,057,663,008) 1,503,908,202
=============
- -----------------------------------------------------------------------------------------------------------------
PREFERRED STOCK - 0.53%
Bermuda Based 247,068 CGA Group, Ltd., Series A (b) (c) 6,176,701
Financial Institutions 171,429 CGA Group, Ltd., Series B (b) (c) 2,507,999
-------------
8,684,700 0.53%
-------------
Insurance Companies 4,775 Ecclesiastical Insurance, 8.625% 10,355 0.00%
-------------
TOTAL PREFERRED STOCK
(Cost $10,472,222) 8,695,055
-------------
</TABLE>
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17
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[GRAPHIC OMITTED]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JANUARY 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES OR
INVESTMENT % OF
AMOUNT ISSUES VALUE NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OTHER INVESTMENTS - 1.93%
Bermuda Based $2,215,000 ESG Partners, LP (c) $ 2,044,427 0.13%
Financial Institutions ------------
Financial Insurance $15,000,000 American Capital Access Holdings, LLC (c) 15,000,000
$190,000 Insurance Partners II Equity Fund, LP 190,000
------------
15,190,000 0.94%
------------
Foreign Currency Swap $50,000,000 Bear Stearns Currency Swap,
Contracts Termination Date 10/26/99 (c) (h) 659,079 0.04%
-----------
Foreign Option $100,000,000 Japanese Yen April 1999 Put Options (c) (e) 43,125
Contracts $50,000,000 Japanese Yen June 1999 Put Options (c) (f) 85,000
$15,000,000 Japanese Yen January 2000 Put Options (c) (g) 407,813
-----------
535,938 0.03%
-----------
Insurance Holding $3,722,756 Head Insurance Investors LP (c) 3,722,756
Companies 100 HIPI Holdings, Inc. (c) 1,267,448
-----------
4,990,204 0.31%
-----------
Money Market Funds $7,749,755 Dreyfus Cash Management 7,749,755 0.48%
-----------
TOTAL OTHER INVESTMENTS
(Cost $32,912,044) 31,169,403
-----------
</TABLE>
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18
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[GRAPHIC OMITTED]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JANUARY 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL % OF
AMOUNT ($) ISSUES VALUE NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. TREASURY BILLS - 0.20%
$1,780,000 U.S. Treasury Bill 4.39%, 11/12/99 (i) $ 1,719,619
1,564,000 U.S. Treasury Bill 4.28%, 12/09/99 (i) 1,505,631
--------------
TOTAL U.S. TREASURY BILLS 3,225,250 0.20%
(Cost $3,225,325) --------------
TOTAL INVESTMENT PORTFOLIO -- 100.25% 1,620,726,602
(Cost $1,190,459,065) --------------
LIABILITIES NET OF CASH
AND OTHER ASSETS - (0.25%) (4,015,331)
--------------
NET ASSETS - 100.00% $1,616,711,271
==============
(Applicable to 48,724,419
shares outstanding)
NET ASSET VALUE PER SHARE $33.18
======
</TABLE>
Notes:
(a) Non-income producing securities.
(b) Affiliated issuers-as defined under the Investment Company Act of 1940
(ownership of 5% or more of the outstanding voting securities of these
issuers).
(c) Restricted/fair valued securities.
(d) Interest accrued at a current rate of
prime + 2%.
(e) 100 million U.S. Dollar notional amount may be exercised on April 17, 1999
to sell 14.4 billion Japanese Yen at a strike price of 143.78.
(f) 50 million U.S. Dollar notional amount may be exercised on June 8, 1999 to
sell 7.5 billion Japanese Yen at a strike price of 150.45.
(g) 15 million U.S. Dollar notional amount may be exercised on January 10, 2000
to sell 1.9 billion Japanese Yen at a strike price of 125.00.
(h) The Fund is selling 5.9 billion Yen and paying an interest rate of 0.14%
in exhange for 50 million U.S. Dollars and an interet rate of 4.63%.
(i) Security segregated for future Fund commitments. * Issuer in default.
ADR: American Depository Receipt.
19
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[GRAPHIC OMITTED]
THIRD AVENUE SMALL-CAP VALUE FUND
Dear Fellow Shareholders:
At January 31, 1999, the end of the first fiscal quarter of 1999, the unaudited
net asset value attributable to the 12,834,763 common shares outstanding of
Third Avenue Small-Cap Value Fund ("Small-Cap Value" or the "Fund") was $11.91,
compared with the Fund's audited net asset value at October 31, 1998 of $10.66.
At February 19, 1999, the unaudited net asset value was $11.11.
QUARTERLY ACTIVITY
During the quarter, Small-Cap Value established a new position in the common
stock of one company, added to nine of its 42 existing positions, and reduced or
eliminated its holdings in three companies. At January 31, 1999, Small-Cap Value
held positions in 42 companies, the top 10 positions of which accounted for
approximately 39% of the Fund's net assets. At quarter's end, approximately 13%
of the Fund's assets were in cash.
NUMBER OF SHARES NEW POSITIONS ACQUIRED
13,000,000 Repap Enterprises Inc. Common Stock
("Repap Common")
INCREASES IN EXISTING POSITIONS
115,900 Alamo Group, Inc. Common Stock
("Alamo Common")
3,500 Avatar Holdings, Inc. Common Stock
("Avatar Common")
20,000 Capital Re Corp. Common Stock
("Capital Re Common")
7,500 Deltic Timber Corp. Common Stock
("Deltic Common")
16,600 Evans & Sutherland Computer Corp.
Inc. Common Stock ("E&S Common")
2,500 Hologic, Inc. Common Stock
("Hologic Common")
15,000 HomeBase, Inc. Common Stock
("HomeBase Common")
- --------------------------------------------------------------------------------
20
<PAGE>
- --------------------------------------------------------------------------------
NUMBER OF SHARES INCREASES IN EXISTING POSITIONS
20,000 Koger Equity, Inc. Common Stock
("Koger Common")
7,500 Sparton Corp. Common Stock
("Sparton Common")
DECREASES IN EXISTING POSITIONS
228,700 ValueVision International, Inc.
Common Stock ("ValueVision Common")
111,000 Xircom, Inc. Common Stock
("Xircom Common")
POSITIONS ELIMINATED
29,800 Summa Four, Inc. Common Stock
("Summa Common")
To paraphrase one investor for whom I have a great deal of respect: we don't get
paid for activity, we get paid to be right. It's too early to tell about the
latter half of that statement, but Small-Cap Value was relatively quiet during
the most recent quarter. We added one new position, Repap Enterprises, which
merits a bit of discussion. I wasn't sure I would ever find myself in the paper
business, but the Fund was offered an interesting opportunity in Repap's common
stock. Small-Cap Value, along with Third Avenue Value Fund, purchased
approximately 19% of Repap's outstanding common stock from the company's largest
shareholder. With its main assets located in New Brunswick, Canada, Repap is a
major integrated producer of coated groundwood paper with an approximate 9%
share of North American capacity. Repap's paper products are used for magazines,
catalogs, advertising inserts and direct mail advertising materials.
The company has very attractive assets, including a first rate management team,
and is probably the low cost producer in North America. Nevertheless, this
investment is unusual - even unique - for us because the company has a highly
leveraged balance sheet. Put bluntly, the left-hand side of the balance sheet is
excellent, the right-hand side stinks. To top it off, conditions in the paper
markets are ultra depressed. For those of you familiar with leveraged buyouts
("LBOs"), this investment comes pretty close. The combination of a heavy debt
load and tough industry conditions has management working very hard, however,
watching every penny. (Skating on a razor's edge, as Repap management must,
tends to focus management's attention, one of the "nice" things from an
investor's perspective about an investment in an LBO). If management can
continue to operate as it has and begin to retire its debt load, then our
investment should do very well.
Small-Cap Value continued its sales of Xircom Common and Summa Four Common for
the same reasons outlined in our last quarterly letter. We also sold part of our
stake in ValueVision Common after "Internet Fever" temporarily overtook
ValueVision's stock price. Apparently, on news that ValueVision may have an
opportunity to do business over
- --------------------------------------------------------------------------------
21
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[GRAPHIC OMITTED]
the Internet, its share price doubled and then almost tripled in a single day,
pushing the stock's value, in our view, way beyond the economic value of the
business, certainly within any time frame that we cared about. The stock
retreated to more reasonable levels and, for the moment at least, our sales
program has ceased.
GETTING MUGGED IN COMMON STOCKS: A CASE STUDY IN POOR CORPORATE MANAGEMENT
Yogi Berra used to say about baseball that "90% of the game is half mental." The
same might be said about corporate management and successful investing. More
often than not successful investing relies on making a reasonably accurate
appraisal of a company's management team. Accurate assessments of management are
not only one of the most important parts of successful investing, but also one
of the hardest. As the following case illustrates, our disappointing investment
in Shiva Corporation Common Stock probably owes much to terrible management.
We currently own 244,800 shares of Shiva Common Stock at an average price of
$10. In October, 1998 Intel announced that it had reached an agreement to
acquire Shiva for $6 per share in cash - a "takeunder," in the parlance, for us
as well as many Shiva shareholders.
Our investment thesis for Shiva, in summary, rested on: 1) a balance sheet with
$100 million in net cash, representing about 1/3 of the company's total market
value, which would either catch the fancy of an acquirer or eventually get
channeled by the company into higher and better purposes; 2) the company's award
winning technology with the imprimatur of some blue chip corporate customers; 3)
a strong presence in the high-growth data networking industry, an industry that,
despite its growth, was consolidating like crazy; and 4) the large spread that
seemed to exist between Shiva's corporate value and the values found in both the
public stock market and takeover values.
These positive attributes notwithstanding, a number of challenges loomed. First
and foremost, the industry was dominated by 800 pound gorillas like Cisco and
Lucent who could offer one-stop shopping to their customers and who benefited
from high-priced stocks that were being used as currency to outbid competitors
for the most attractive, technology-rich properties. As importantly, Shiva had
been losing money and its base business was beginning to erode.
To help chart a new course, Shiva hired a new CEO, Jim Zucco, a Lucent
Technologies' alumnus, who promised to enhance the value of the company's
prospects. Subsequent to our purchases, Shiva used some of its excess cash to
acquire another business that also appeared to create value for the company. We
believed, correctly, that trends in the industry suggested that the smaller
players were likely to get acquired and that our exit from Shiva would probably
come in the form of a takeover. In all of this, what we did not appreciate was
management's utter disregard for its shareholder constituency.
A number of interesting artifacts emerge from Shiva's proxy statement. Some of
the more salient of these, which support my views about management, are outlined
below.
o INADEQUATELY BANKED FROM A SHAREHOLDER PERSPECTIVE. Shiva management
reported that its investment banker had "approached a number of other
companies as to the possibility of acquiring the company." Yet Shiva
had only engaged its banker on October 2, 1998, roughly two weeks
before the deal with Intel was signed and announced. Is it plausible
that Shiva's bankers could have done an adequate job of shopping the
company given only two weeks?
- --------------------------------------------------------------------------------
22
<PAGE>
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[GRAPHIC OMITTED]
o THE $336 MILLION QUESTION. Shiva's banker had published research on the
company in late July, just two and a half months before the deal was
struck, which called for a "price target"of $17. The report
specifically cited "strong management engineering a turn-around" and "a
sizeable installed base" that "gives Shiva a unique position in the
market." Is it conceivable that the same firm can, on the one hand tell
public investors that a company is worth $17 per share and, on the
other, advise the company's board only a short time later that $6 per
share is a fair price for the company? Where could the $336 million -
the difference between $17 and $6, based on Shiva's 30.5 million shares
outstanding - have gone?
o TYPE OF CONSIDERATION MATTERS. Shiva's banker stated that it had
reviewed premiums paid - the premium paid over the then current market
prices -- in 214 other technology transactions. Of these, it was
reported that only 37 were cash purchase transactions. Given that the
overwhelming majority of deals were done for stock, why did Shiva's
management elect to take cash instead of, most obviously, Intel stock?
Particularly when the transaction, as proposed, would be a taxable
event! Normally, cash deals carry lower premiums than do stock or paper
deals since paper carries with it some uncertainty. It's likely then
that Shiva management could have negotiated a higher premium had the
consideration been in the form of Intel stock rather than cash.
o STOCK FOR ME, CASH FOR YOU. While the choice of consideration precluded
Shiva's outside shareholders from participating in any appreciation in
Intel's stock, and probably reduced the premium paid, Shiva's
management nonetheless elected to take Intel stock for themselves in
exchange for their worthless Shiva options.
o PREMIUM, SCHMEMIUM. Finally, Shiva management negotiated the sale of
the company during September and October, 1998, a time of extreme
duress in the public stock and bond markets. (Readers will recall that
the S&P 500 and the Nasdaq Composite were down 20% and 30%,
respectively, from their summer highs through early October.) Put
simply, management gave the company away at a distressed price. Premium
analysis goes out the window, or should get weighted very lightly,
during times of extreme market conditions. At the very least, Shiva's
management ought to consider asking its banker to update its fairness
opinion to reflect today's market conditions - not the almost unique
conditions experienced during September and October.
It's difficult to understand a management that would sell its company at a price
and for consideration that means losses for what I believe is the majority of
its shareholders, despite a banker's "fairness" opinion. I would recommend that
Shiva get a new fairness opinion, renegotiate with Intel or identify a new
suitor.
Perhaps the majority of Shiva's shareholders do feel as if they have been
mugged. If so, they might remember that as they vote their proxies for the
shareholder meeting on February 26, 1999.
- --------------------------------------------------------------------------------
23
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Fortunately, our experience with Shiva is more the exception than the rule. Our
experiences with Xircom and Summa Four, for example, both of which operate in
industries related to Shiva's, have been most gratifying and illustrate that our
investment discipline continues to work well.
I look forward to writing you again when we publish our Semi-Annual Report dated
April 30, 1999.
Sincerely,
/s/ Curtis Jensen
- --------------------------
Curtis Jensen
Co-manager, Third Avenue Small-Cap Value Fund
- --------------------------------------------------------------------------------
24
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[GRAPHIC OMITTED]
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
PORTFOLIO OF INVESTMENTS
AT JANUARY 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
% OF
SHARES ISSUES VALUE NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS - 87.44%
Construction-Japan 431,900 Sawako Corp., Sponsored ADR $ 2,402,444 1.57%
-----------
Financial Insurance 45,000 Capital Re Corp. 818,438
60,300 Financial Security Assurance Holdings Ltd. 3,312,731
113,324 MBIA Inc. 7,429,805
-----------
11,560,974 7.56%
-----------
Industrial Equipment 143,500 Alamo Group, Inc. (b) 1,722,000 1.12%
-----------
Life Insurance 179,000 FBL Financial Group, Inc. Class A 3,870,875 2.53%
-----------
Manufactured Housing 184,300 Skyline Corp. 5,667,225 3.70%
-----------
Media 180,000 ValueVision International, Inc. Class A (a) 1,665,000 1.09%
-----------
Medical Supplies 10,000 Acuson Corp. (a) 133,750
& Services 112,500 Hologic, Inc (a) 1,448,437
278,000 Protocol Systems, Inc. (a) (b) 2,085,000
-----------
3,667,187 2.40%
-----------
Natural Resources & 187,500 Alexander & Baldwin, Inc. 3,791,006
Real Estate 241,400 Alico, Inc. 4,435,725
238,500 Avatar Holdings, Inc. (a ) (b) 4,591,125
126,900 Cabot Industrial Trust 2,506,275
234,300 Deltic Timber Corp. 5,593,912
206,000 Koger Equity, Inc. 3,141,500
200,000 Tejon Ranch Co. (d) 3,465,882
1,104,700 The TimberWest Forest Corp. (Canada) 6,727,444
-----------
34,252,869 22.40%
-----------
Non-Life 2,425,000 The Nissan Fire & Marine Insurance Co., Ltd. 6,464,994 4.23%
Insurance-Japan -----------
Paper & Related 13,000,000 Repap Enterprises Inc. (a) 1,040,000 0.68%
Products -----------
</TABLE>
- --------------------------------------------------------------------------------
25
<PAGE>
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[GRAPHIC OMITTED]
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JANUARY 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
% OF
SHARES ISSUES VALUE NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS (CONTINUED)
Retail 426,100 HomeBase, Inc. (a) (b) $ 2,849,544
261,700 Value City Department Stores, Inc. (a) 3,042,262
-----------
5,891,806 3.85%
-----------
Semiconductor 520,000 C.P. Clare Corp. (a) (b) (c) 3,445,000
Equipment Manufacturers 154,500 Electroglas, Inc. (a) 2,587,875
and Related 417,400 FSI International, Inc. (a) 5,817,513
164,200 Silicon Valley Group, Inc. (a) 2,699,038
309,200 SpeedFam International, Inc. (a) (b) 6,454,550
-----------
21,003,976 13.74%
-----------
Technology 275,000 ACT Networks, Inc. (a) 4,073,438
25,000 Bel Fuse, Inc. Class A (a) 990,625
40,700 Bel Fuse, Inc. Class B (a) (b) 1,444,850
117,400 Boston Communications Group, Inc. (a) 1,159,325
326,900 Centigram Communications Corp. (a) 3,371,156
133,200 Evans & Sutherland Computer Corp. (a) (b) 2,256,075
257,300 Glenayre Technologies, Inc. (a) (b) 1,286,500
161,500 PictureTel Corp. (a) 1,448,445
370,300 Planar Systems, Inc. (a) 3,402,131
101,500 Rofin-Sinar Technologies, Inc. (a) (b) 888,125
244,800 Shiva Corp. (a) 1,430,538
122,000 Sparton Corp. (a) 907,375
490,600 SpecTran Corp. (a) (b) (c) 2,698,300
129,400 Xircom, Inc. (a) 5,855,350
-----------
31,212,233 20.41%
-----------
Title Insurance 108,000 First American Financial Corp. 3,300,750 2.16%
-----------
TOTAL COMMON STOCKS
(Cost $140,302,372) 133,722,333
-----------
</TABLE>
- --------------------------------------------------------------------------------
26
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JANUARY 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL % OF
AMOUNT($) ISSUES VALUE NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OTHER INVESTMENTS - 0.08%
Foreign Option Contracts 7,000,000 Canadian Dollar July 1999 Put Options (d) (e) $ 125,825
10,000,000 Japanese Yen February 1999 Put Options (d) (f) 0
-------------
TOTAL OTHER INVESTMENTS
(Cost $197,900) 125,825 0.08%
-------------
- -------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS - 12.50%
Repurchase Agreements19,109,307 Bear Stearns 4.73%, due date February 1, 1999 (g) 19,109,307 12.50%
-------------
TOTAL SHORT TERM INVESTMENTS
(Cost $19,109,307)
TOTAL INVESTMENT PORTFOLIO - 100.02%
(Cost $159,609,579) 152,957,465
-------------
Liabilities Net of Cash
AND OTHER ASSETS - (0.02%) (35,730)
-------------
NET ASSETS - 100.00% $ 152,921,735
(Applicable to 12,834,763 =============
shares outstanding)
NET ASSET VALUE PER SHARE $11.91
======
</TABLE>
Notes:
(a) Non-income producing securities.
(b) Securities whole or in part on loan: At January 31, 1999 the value of
securities on loan was $8,974,660 (equating to 5.87% of net assets.)
(c) Affiliated issuers-as defined under the Investment Company Act of 1940
(ownership of 5% or more of the outstanding voting securities of these
issuers).
(d) Restricted/fair valued securities.
(e) 7 million U.S. Dollar notional amount may be exercised on July 2,1999 to
sell 10.6 million Canadian Dollars at a strike price of 1.52.
(f) 10 million U.S. Dollar notional amount may be exercised on February 2,
1999 to sell 1.4 billion Japanese Yen at a strike price of 136.50.
(g) Repurchase agreement collateralized by:
Southern Pacific Securities, Inc., par value $38,875,000,
5.87%, matures 5/25/27: market value $18,013,712 Bear Sterns
Mortgage Securities, Inc., par value $1,490,000, 6.81%, matures
6/25/30: market value $1,458,529.
ADR: American Depository Receipt.
- --------------------------------------------------------------------------------
27
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
THIRD AVENUE HIGH YIELD FUND
Dear Fellow Shareholders:
At January 31, 1999, the unaudited net asset value attributable to the 929,310
common shares outstanding of the Third Avenue High Yield Fund (the "Fund") was
$9.58 per share. This compares with an audited net asset value of $8.50 per
share at October 31, 1998, and a net asset value at February 12, 1998, the
inception date of the Fund, of $10.00 per share. From February 12, 1998, through
December 31, 1998, the most recent dividend date, the Fund has paid a total of
$0.463 per share in dividends, representing income received from the Fund's
holding of fixed income securities. At February 19, 1999, the unaudited net
asset value was $9.22 per share.
QUARTERLY ACTIVITY
During the first quarter of fiscal 1999, the Fund made a small reduction in one
holding, as shown below.
PAR VALUE REDUCTION IN EXISTING POSITION
- ------- ----------------------
$100,000 Alpharma, Inc. 5.75% due 4/01/05
We reduced this position because the percentage of total portfolio assets which
the issue represented had increased from its initial purchase weighting, as a
result of substantial price appreciation. By lowering the size of our
investment, we reduced its weighting to about the market size of our initial
commitment.
We continue to view Alpharma's business prospects favorably. Alpharma is a
generic pharmaceutical company which develops and sells a wide range of human
and animal health products. It is not overly dependent on any individual product
for a significant part of its sales, and since its products are sold worldwide,
the company does not rely on any particular country. Alpharma continues to
broaden its geographic reach, to develop new products with high growth
potential, and to streamline its marketing and manufacturing activities.
ASSET CONVERSION
During the quarter, Coltec Industries, whose convertible preferred security is
held in the Fund, accepted a merger offer from B. F. Goodrich. This merger would
be a positive credit event for our holding. Coltec's preferred is rated B2/B+ by
the rating services (Moody's/Standard & Poors), while its bonds are rated
Ba2/BB, or high yield, junk bond status. B. F. Goodrich is an investment grade
company, whose bond rating is Baa1/A-. Subsequent to the Goodrich offer, Coltec
also received a hostile takeover offer from Crane Co., also an investment grade
company. However, it is expected that the Goodrich merger will close in April.
The Coltec merger represents the third asset conversion in the Fund's portfolio
in the first year since the Fund's inception in February, 1998. Previously, our
bond position in DSC Communications was substantially upgraded when DSC was
taken over by A-rated French telecommunications giant Alcatel. Our position of
U.S. Office Products convertible bonds received a tender offer at a substantial
premium to our cost as a result of a restructuring and asset spin-offs by the
company.
- --------------------------------------------------------------------------------
28
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
SHORT-TERM PRICE CHANGES VS. LONG-TERM INVESTMENT VALUE
These asset conversions exemplify how our research-intensive approach has
delivered value in finding superior companies with great fundamental worth for
long-term investments, despite interim fluctuations in market prices of these
issues.
In our effort to seek total return from investment in a wide variety of below
investment grade securities, we have pursued opportunities in convertible
securities. Our rationale for utilizing convertibles, and some examples of
issues selected, are discussed below.
WHY THE FUND USES CONVERTIBLE ISSUES
In order to achieve our investment objective of maximizing total return, the
Fund utilizes a combination of straight bonds and convertible issues (both bonds
and preferreds), primarily rated below investment grade. So-called straight
bonds give the investor a stated interest rate, called its coupon rate, and
obligate the issuer, or borrower, to repay the proceeds at the maturity date.
The total rate of return which the Fund would earn from a bond holding would
consist of the income stream, plus an adjustment depending if the issue were
purchased at a discount or premium from its face (par) value, compared to the
holding's terminal value--either its price at sale, or at its maturity.
Convertible bonds typically also have these coupon and maturity features.
However, in addition, they offer the opportunity for the investor to share in
some of the upside of any appreciation of the common stock of the issuing
company. We have many convertible holdings in the Fund, because we feel they
offer a better chance in sharing any improvement in a company's fortunes than
that given by straight bonds.
Another significant reason we use convertibles is so that we might invest in
companies and industries with bright long-term prospects which do not have high
yield bonds outstanding. These companies may, however, have issued convertible
securities. For example, many rapidly growing technology companies have
convertible bonds outstanding, but have not issued high yield bonds.
HOW CONVERTIBLE BONDS WORK
The Alpharma issue which the Fund holds is a convertible bond. It provides
semiannual interest payments (as bonds usually do), in this case amounting to
$28.75 every six months, or $57.50 per year (representing 5.75% of each $1,000
bond). The issuer is obliged to repay its face or par value of $1,000 at
maturity on April 1, 2005. However, in contrast to straight bonds, a convertible
bond also gives the investor the opportunity to share in some of the price
appreciation of the underlying stock, should that happy event occur.
To illustrate with the Alpharma 5.75% bonds, when this bond was issued in March,
1998, each $1,000 bond entitled the buyer to purchase 34.973 shares of common
stock at a price of $28.59375 per share. At the time the bond was issued, the
common stock was selling at $22.875. Thus the purchase price at which one could
exchange bonds for stock was at a 25% premium to where the stock was selling
($28.59375/$22.875). The Fund did not buy this security as a new issue, but
purchased it in secondary market trading at a modest discount from par (face)
value.
- --------------------------------------------------------------------------------
29
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Why would we buy this issue, instead of just buying the stock, when the price
for our converting into common stock was higher than where the common was then
trading? Because the common stock does not pay a dividend, and thus would not
help us in achieving our primary goal of total return through investment in
income-producing securities with below investment grade ratings. The coupon rate
of 5.75% goes a long way to reaching our income goal, and if the stock has just
modest price appreciation, the convertible bond typically should also go up.
Thus we can have the potential to earn a total rate of return (that is, income
plus capital appreciation) that would exceed that of an average high yield,
below-investment grade bond, whose potential price appreciation is limited by
its call price.
In fact, the common stock had appreciated substantially since our purchase of
the bonds by the time of our sale in early January. When we modestly reduced our
position, we received a price of $1,352.50 per $1,000 bond, in addition to the
income earned since the purchase date. You may recall from the conversion terms
outlined above that the bonds entitled us to purchase approximately 35 shares at
$28.60 per share, a level that by early January was at a substantial discount to
the $35 share price where the stock was trading when we sold the bonds. Thus,
the bonds' appreciation largely reflects this conversion privilege of purchasing
stock at $28.60 per share, at a time when the market price was $35 per share.
Had the stock gone down during the period, the bond probably would also have
dropped in price, but owing to its interest income, most likely would not have
fallen in the same proportion as any stock decline. Of course, the income stream
provides us with a cash return to make additional investments while we await the
possibility of future underlying common stock appreciation.
It is important to keep in mind that convertible bonds typically are
subordinated debt obligations within a company's capital structure, and thus
subject to greater loss should the company reorganize or liquidate its
operations under bankruptcy laws. First claim on a company's assets goes to
post-bankruptcy liabilities and taxes, followed by secured claims, such as
mortgages, and then other senior claims. Only after these creditors' obligations
have been satisfied, will the claims of subordinated unsecured creditors, such
as convertible bond holders, be considered, with whatever assets, if any,
remain. (Equity holders are last in priority, after all debt obligations.) So
while convertible bond holders may benefit in cases where the underlying stock
goes up, should the company run into serious financial or operational
difficulties, the subordinated status of convertibles also significantly
increases the risk of loss.
ADDITIONAL CONVERTIBLE BOND INVESTMENT CONSIDERATIONS
The Alpharma bonds provide an illustration of a convertible trading at or above
its par value. However, most of the Fund's convertible bonds were bought at
substantial discounts from par, at yields to maturity equal to, or in some
cases, substantially exceeding the yields to maturity of comparable quality
straight high yield bonds lacking any equity convertibility feature. The Fund
opportunistically will change its asset mix between convertible and straight
bonds, depending on where we see the greatest investment value for the cheapest
price.
- --------------------------------------------------------------------------------
30
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
An example of how we view investment value in deeply discounted convertibles is
our holding of Lam Research 5.00% bonds due September 1, 2002. This company is a
leading semiconductor equipment manufacturer, making products used in some of
the many steps involved in transforming silicon wafers into semiconductor chips.
The Fund has approximately 14.5% of its assets in this industry, which Third
Avenue Funds view as an extremely attractive, long-term growth area.
At the time of our annual shareholder letter for the year ending October 31,
1998, we discussed the market turmoil then taking place, which caused the
extremely depressed convertible bond market to reach its cheapest valuation,
relative to underlying common stock prices and interest rates, in the last ten
years. To illustrate, at the end of October, our Lam convertible holding was
priced at $791.25 per $1,000 face value, which equaled a yield to maturity of
12.32%.
We felt very strongly at the time that this well-managed company, albeit in the
midst of a temporary industry downturn, was of far better investment value than
that of the average high yield bond (so-called junk bonds) available at the same
time. In fact, the yield of the Lam bonds exceeded that of the average single
B-rated bond index (based on rating services Moody's and Standard & Poors),
which at the end of October was 11.64%, according to data from Merrill Lynch.
But what about the convertibility feature of the Lam bonds? What sort of value
did that represent for the bonds? At the end of October, that feature was
apparently worth almost nothing: The Lam bonds were issued in August, 1997, and
gave us the right to buy 11.3935 shares at $87.7687. But since Lam stock was
selling at just $14.44 per share at month-end October, that conversion privilege
seemed of little value. But at a yield well above 12%, we felt this holding was
very attractive based on its bond value alone, even if there was no value to the
equity option. The sharp market drop in both Lam stock and bonds in October did
not alter our judgment of the strong underlying value of this company. We
continued to maintain our relatively large holding.
Since then, both the convertible and high yield market have stabilized
considerably, and improved in price. The marketplace has come to share our
long-held opinion of the value of the technology sector, and by the end of
January, 1999, the price of Lam stock was $38.375, and the bond was valued at
around $897.50, representing a yield to maturity of 8.36%. This bond price
represents a substantial recovery from last fall's levels, as well as a moderate
gain over our purchase price last spring, before taking into account the
generous income we have received from this issue.
While the possibility of our right to buy Lam stock at $87 still seems of small
value today, we are patient and optimistic holders. And if we only get our
coupon income, and pay-off of $1,000 per bond at maturity in 2002-- for a bond
we bought at a substantial discount--we believe the total rate of return
achieved will compare favorably with that of many straight high yield bonds.
- --------------------------------------------------------------------------------
31
<PAGE>
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
DIVIDEND DISTRIBUTION
During the quarter ending December 31, 1998, the Fund declared a dividend of
$0.183 per share to holders on the record date of December 30, 1998, payable on
January 6, 1999. This distribution was payable in cash, or, for those
shareholders who have elected the reinvestment option, in additional Fund shares
at the Fund's net asset value on December 31, 1998.
I look forward to writing to you again when the Semi-Annual Report is published
after our April 30, 1999 quarter is completed.
Sincerely yours,
/s/ Margaret D. Patel
- -----------------------------
Margaret D. Patel
Portfolio Manager, Third Avenue High Yield Fund
- --------------------------------------------------------------------------------
32
<PAGE>
[GRAPHIC OMITTED]
Third Avenue Trust
Third Avenue High Yield Fund
Portfolio of Investments
at January 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
PRINCIPAL % OF
AMOUNT ($) ISSUES VALUE NET ASSETS
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONVERTIBLE BONDS - 55.39%
Capital Equipment - 450,000 Lam Research Corp. 5.00%, due 9/1/02 $ 403,875 4.54%
Semiconductors -----------
Computers - Memory 300,000 HMT Technology Corp. 5.75%, due 1/15/04 235,125 2.64%
Devices -----------
Electric Utility Services 400,000 Itron, Inc. 6.75%, due 3/31/04 279,500 3.14%
----------
Electronic Components - 325,000 Amtel SA 144A 3.25%, due 6/1/02 293,719
Semiconductors 325,000 Cypress Semiconductors Corp. 6.00%, due 10/1/02 297,781
----------
591,500 6.64%
----------
Instrumentation - 600,000 Credence Systems Corp. 5.25%, due 9/15/02 478,500 5.38%
Electronic Testing ----------
Lasers - 450,000 Cymer, Inc. 3.50%, due 8/6/04 398,250 4.47%
Systems/Components ----------
Medical - Generic Drugs 375,000 Alpharma, Inc. 144A 5.75%, due 4/1/05 514,219 5.78%
----------
Medical - Hospitals 625,000 Columbia\HCA Medical Care, Int'l. 6.75%, due 10/1/06 551,562 6.20%
----------
Medical Management 505,000 PhyMatrix Corp. 6.75%, due 6/15/03 234,194 2.63%
Services ----------
Networking 425,000 Adaptec, Inc. 4.75%, due 2/1/04 355,937 4.00%
----------
Oil/Gas Exploration 300,000 Range Resources Corp. 6.00%, due 2/1/07 169,500
300,000 Pogo Producing Co. 5.50%, due 6/15/06 206,625
----------
376,125 4.22%
----------
Oil Field Services 300,000 Key Energy Group, Inc. 5.00%, due 9/15/04 146,625 1.65%
----------
Telecommunications - 500,000 P-Com, Inc 4.25% due 11/1/02 365,000 4.10%
Wireless ----------
TOTAL CONVERTIBLE BONDS
(Cost $5,546,378) 4,930,412
----------
</TABLE>
- --------------------------------------------------------------------------------
33
<PAGE>
[GRAPHIC OMITTED]
Third Avenue Trust
Third Avenue High Yield Fund
Portfolio of Investments (continued)
at January 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
% OF
SHARES ISSUES VALUE NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONVERTIBLE PREFERRED STOCK - 19.12%
Auto Parts Original 7,000 Breed Technologies, Inc. 6.50%, due 11/15/27 $ 153,125 1.72%
------------
Diversified 5,000 Coltec Capital Trust 144A 5.25%, due 4/15/28 212,500 2.39%
------------
Manufacturing
Electric Utility Services 4,000 Texas Utilities 9.25%, due 8/16/01 221,500 2.49%
-----------
Insurance 5,000 Conseco Finance Trust IV 7.00%, due 2/16/01 200,313 2.25%
-----------
Medical - 9,000 Sun Financing I 144A 7.00%, due 5/1/28 93,375 1.04%
Long Term/Subacute -----------
Rental Auto Equipment 6,000 Budget Group Capital Trust 144A 6.25%, due 6/15/05 231,000 2.59%
-----------
Telecommunications - 5,000 Winstar Communications, Inc. 144A 7.00% Due 3/15/10 245,625 2.76%
Wireless -----------
Telephone Services 6,000 Nextlink Communications, Inc. 144A 6.50%, due 3/31/10 345,000 3.88%
-----------
TOTAL CONVERTIBLE PREFERRED STOCK
(Cost $2,162,067) 1,702,438
-----------
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT ($)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CORPORATE BONDS - 17.75%
Electric Utility Services 500,000 CalEnergy Co., Inc. 8.48%, due 9/15/28 601,250 6.75%
----------
Real Estate - Commercial 500,000 BF Saul REIT 144A 9.75%, due 4/1/08 478,750 5.38%
----------
Telephone Services 500,000 Level 3 Communications, Inc. 144A 9.125%, due 5/1/08 500,000 5.62%
----------
TOTAL CORPORATE BONDS
(Cost $1,498,006) 1,580,000
----------
</TABLE>
- --------------------------------------------------------------------------------
34
<PAGE>
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[GRAPHIC OMITTED]
THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JANUARY 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
% OF
SHARES ISSUES VALUE NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stocks - 0.26%
Telecommunications - 535 Winstar Communications, Inc. (a) $ 22,938 0.26%
Wireless ----------
TOTAL COMMON STOCK
(Cost $13,028) 22,938
---------
TOTAL INVESTMENT PORTFOLIO - 92.52%
(Cost $9,219,479) 8,235,788
----------
CASH AND OTHER ASSETS
LESS LIABILITIES - 7.48% 665,697
----------
NET ASSETS - 100.00% $8,901,485
(Applicable to 929,310 ==========
shares outstanding)
NET ASSET VALUE PER SHARE $9.58
=====
</TABLE>
Notes:
(a) Non - income producing security.
- --------------------------------------------------------------------------------
35
<PAGE>
[GRAPHIC OMITTED]
THIRD AVENUE REAL ESTATE VALUE FUND
Dear Fellow Shareholders:
At January 31, 1999, the end of our first fiscal quarter, the unaudited net
asset value attributable to the 327,678 shares outstanding of the Third Avenue
Real Estate Value Fund (the "Fund") was $10.82 per share. This compared with the
Fund's audited net asset value at October 31, 1998 of $10.28 per share. As of
February 19, 1999 the unaudited net assets totaled $3,556,435, attributable to
the 343,588 common shares outstanding with a net asset value of $10.35 per
share.
QUARTERLY ACTIVITY
During the first quarter of fiscal 1999, the Fund established new positions in
the common stocks of five companies, and increased its position in the common
stocks of nine companies. At January 31, 1999, the Fund held positions in 17
companies, and was approximately 74% invested. The Fund's top 10 positions
accounted for approximately 55% of the Fund's net assets. The Fund did not
reduce or sell any positions during the quarter.
<TABLE>
<CAPTION>
NUMBER OF SHARES NEW POSITIONS ACQUIRED
<S> <C>
18,000 Aegis Realty Inc. ("Aegis Common")
29,000 Anthracite Capital Inc. ("Anthracite Common")
6,000 Consolidated-Tomoka Land Co. ("Consolidated Common")
7,900 Echelon International Corp., Inc. ("Echelon Common")
17,300 Wellsford Real Properties ("Wellsford Common")
INCREASES IN EXISTING POSITIONS
9,500 Avatar Holdings, Inc. ("Avatar Common")
5,500 Deltic Timber Corp. ("Deltic Common")
5,000 Forest City Enterprises, Inc. Class A ("Forest City
Common")
21,000 Imperial Credit Commercial Mortgage Investment Corp.
("Imperial Common")
7,000 Koger Equity, Inc. ("Koger Common")
6,000 LNR Property Corp. ("LNR Common")
14,500 Security Capital Group, Inc. Class B ("Security Capital
Common")
7,500 St. Joe Company ("St. Joe Common")
19,000 United Investors Realty Trust ("United Investors Common")
</TABLE>
- --------------------------------------------------------------------------------
36
<PAGE>
[GRAPHIC OMITTED]
It is always satisfying to invest in a company and then have your judgement
confirmed by watching the stock price increase. However, the Fund's goal is
long-term capital appreciation, and we instinctively are willing to sacrifice
short-term results for long-term value creation. Since the Fund is still new,
and in the asset-building stage, it is frustrating to take an initial position
in a company - using limited funds - only to have the price increase
substantially before we have established a meaningful position. This happened to
us with a few of our initial holdings (Catellus Development Corp. and Timberwest
Forest Corp.). During the first quarter, we took advantage of declining stock
prices in several of our initial holdings and increased our positions by
averaging down. If our initial analysis tells us we should buy stock at $20, and
then it subsequently goes down to $15, provided that our analysis is still
valid, we average down with confidence.
OVERVIEW OF NEW POSITIONS ESTABLISHED DURING THE QUARTER:
ANTHRACITE CAPITAL is a mortgage REIT (real estate investment trust) that
suffered from the turmoil in the commercial mortgage-backed securities (CMBS)
market last fall. However, since the company just went public in March 1998, it
didn't have the chance to fully implement its business plan of investing in
subordinate (non-investment grade and unrated) CMBS. In the interim, the company
used a substantial portion of its IPO proceeds plus short-term collateralized
financing to invest in AAA-rated CMBS. Last fall, the spread between yields on
U.S. Treasury securities and other debt securities widened dramatically because
of investors' "perceived" additional credit risks in all but U.S. government
securities. The increase in spreads resulted in dramatic decreases in market
prices of CMBS (especially subordinated classes). Mortgage REITs, such as
Anthracite, that owned leveraged portfolios of CMBS experienced mark-to-market
losses, and thus were subjected to margin calls by their lenders. In order to
meet margin calls, Anthracite sold a substantial portion of its AAA-rated
securities, realizing losses of about $1.00 per share. The company also reduced
the book value of its subordinated CMBS by recording mark-to-market write-downs
(unrealized losses) of about $4.00 per share. These unrealized losses reflect
short-term price changes, and not necessarily a decrease in credit quality of
the assets.
According to Anthracite's management, of the 1,800 mortgage loans that compose
the underlying collateral for the company's CMBS portfolio, only one loan is
more than 30 days delinquent. That's a pretty strong statement regarding credit
quality. We have been buying stock at about 27% below adjusted book value. It is
our view that CMBS prices do not reflect their real value and, short of a forced
liquidation, the net realizable value of Anthracite's portfolio is greater than
its book value. In the meantime, the $.29 quarterly dividend seems reasonably
secure, and gives us a 17% current yield.
CONSOLIDATED-TOMOKA owns 15,700 acres of land in Volusia County, Florida - most
of which lies within Daytona Beach city limits - and straddles Interstate 95 for
6 miles. Additionally, the company owns 3,900 acres of citrus groves and a
citrus packing plant in Highlands County, Florida. Most of the company's land
has been owned for more than 50 years and is carried on the books at
approximately $100 per acre. The company is developing a 3,600 acre mixed use
development in Daytona Beach which currently includes the national headquarters
for the LPGA, two championship golf courses (open to the public) and residential
communities. Additional residential communities are under development and resort
facilities are planned. The company has recently announced it is under contract
to sell
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its citrus land and packing and related operations. If the sale is completed
(which is scheduled for March 1999), the company will focus its business
activities almost exclusively on the development of its real estate.
ECHELON INTERNATIONAL is a real estate development and operating company that
specializes in multifamily and commercial properties, primarily in the Tampa
Bay, Florida area. The company's commercial properties primarily consist of
Class A office buildings, most of which are nearly fully occupied by a high
percentage of high-quality tenants with long-term leases. The company's growth
over the next five years will come from its multifamily developments. The
company's first multifamily project (369 units in Tampa Bay) will be completed
in February, 1999 and another five projects (1,389 units) are under
construction. Once stabilized, the company's properties are conservatively
financed with long-term, non-recourse mortgage debt. In addition to its real
estate assets, the company owns a portfolio of aircraft leases which represents
about 25% of the company's operating revenues. The company is gradually
withdrawing from the aircraft leasing business and is focusing on its core real
estate operations. In the meantime, the company will be somewhat more difficult
for traditional analysts and investors to understand than a pure real estate
company and will most likely continue to trade at a discount. We've been buying
shares at a 30% discount to book value and a 43% discount to our estimate of net
asset value (NAV). The company is not a REIT, and therefore is not required to
pay cash dividends.
WELLSFORD REAL PROPERTIES is a real estate merchant banking firm which develops,
owns and leases apartments; rehabilitates and repositions office buildings; and
invests in debt and equity securities of public and private real estate
companies. The company takes an opportunistic investment approach and seeks to
buy properties that require repositioning and/or renovation. An example of the
company's investment style was the $15.8 million purchase of 194 acres of land
and two office buildings with an aggregate 560,000 square feet in Wayne, New
Jersey. Though the buildings were vacant when acquired (formerly the
international headquarters for American Cyanamid), the purchase price equated to
only $28 per square foot assuming the entire purchase price was allocated to the
buildings. Upon completion of renovations and tenant improvements, the buildings
should be worth over $160 per square foot with an all-in cost of about $110. The
194 acres is zoned for the development of an addition one million square feet of
office or research space. We have been buying stock at about a 20% discount to
book value and a 32% discount to our estimate of NAV.
AEGIS REALTY is a small REIT ($80 million equity capitalization) that invests
primarily in grocery-anchored shopping centers across the United States. Most of
the company's properties are owned debt-free, and the others are conservatively
leveraged with non-recourse mortgage financing. The company is gaining a
reputation for making strategic acquisitions and substantially increasing value
by providing the necessary capital for renovations and/or re-tenanting. We have
been buying the common stock at a 35% discount to book value and a 40% discount
to our estimate of NAV.
Real estate development and operating companies make up the Fund's core
holdings. At the end of the first quarter, the Fund had positions in 8 such
companies, representing 35% of the Fund's assets (40% at February 19, 1999). I
like these companies because of their unique ability to create value. Not only
did we establish our positions at significant discounts to NAV, but each of
these companies has a pipeline of development projects that will provide unique
opportunities for future growth without the need to make acquisitions. Real
estate development is certainly riskier
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38
<PAGE>
than buying stabilized properties. If done right, however, the rewards will far
outweigh risks. Our evaluation of a real estate company incorporates many
factors, but ultimately comes down to our evaluation of management.
Before we invest, we try to get comfortable with management's talent and ability
to properly weigh the risks of proceeding with new developments. I spent ten
years of my career in the real estate development business. Real estate
developers are among the most optimistic business people I know. The developer's
mantra, "if we build it, they (tenants) will come," resulted in the real estate
meltdown of the late 1980s. (Of course, the lender's mantra, "if they build it,
we'll make the loan," didn't help the situation either - but maybe I'll make
that the subject of a future quarterly letter.) Management must take calculated
risks when proceeding with a development project and we must take calculated
risks when investing in their company. We don't expect that every investment
decision will be a winner, either by management or by us. With the proper mix of
due diligence and cautious optimism, the winners should outnumber the losers.
I look forward to writing to you again when we publish our Semi-Annual Report
for the period ending April 30, 1999.
Sincerely,
/s/ Michael H. Winer
- ---------------------------
Michael H. Winer
Co-manager, Third Avenue Real Estate Value Fund
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39
<PAGE>
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THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JANUARY 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
% OF
SHARES ISSUES VALUE NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS - 74.02%
Natural Resources 6,500 Deltic Timber Corp. $ 155,187
4,000 The TimberWest Forest Corp. (Canada) 24,359
----------
179,546 5.06%
----------
Real Estate Development 12,500 Avatar Holdings, Inc. (a) 240,625
2,000 Catellus Development Corp. (a) 30,750
6,000 Consolidated-Tomoka Land Co. 87,000
7,900 Echelon International Corp., Inc. (a) 170,838
6,000 Forest City Enterprises, Inc. Class A 151,875
9,000 LNR Property Corp. 192,375
8,500 St. Joe Co. 189,125
17,300 Wellsford Real Properties Inc. (a) 171,919
----------
1,234,507 34.82%
----------
Real Estate 16,500 Security Capital Group, Inc. Class B (a) 208,313 5.88%
Holding Company ----------
Real Estate 18,000 Aegis Realty Inc. 184,500
Investment Trust 29,000 Anthracite Capital Inc. 199,375
6,000 Commercial Assets, Inc. 36,375
24,000 Imperial Credit Commercial Mortgage Investment Corp. 229,500
11,000 Koger Equity, Inc. 167,750
25,000 United Investors Realty Trust 184,375
----------
1,001,875 28.26%
----------
TOTAL COMMON STOCKS
(Cost $2,490,976) 2,624,241
----------
TOTAL INVESTMENT PORTFOLIO - 74.02%
(Cost $2,490,976) $2,624,241
----------
CASH AND OTHER ASSETS
LESS LIABILITIES - 25.98% 920,978
----------
NET ASSETS - 100.00% $3,545,219
(Applicable to 327,678 ==========
shares outstanding)
NET ASSET VALUE PER SHARE $10.82
======
Notes:
</TABLE>
(a) Non-income producing securities.
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40
<PAGE>
BOARD OF TRUSTEES
Phyllis W. Beck
Lucinda Franks
Gerald Hellerman
Marvin Moser
Myron M. Sheinfeld
Martin Shubik
Charles C. Walden
Barbara Whitman
Martin J. Whitman
OFFICERS
Martin J. Whitman
Chairman, Chief Executive Officer
David M. Barse
President, Chief Operating Officer
Michael Carney
Chief Financial Officer, Treasurer
Kerri Weltz, Assistant Treasurer
Ian M. Kirschner, General Counsel and Secretary
TRANSFER AGENT
First Data Investor Services Group, Inc.
3200 Horizon Drive
P.O. Box 61503
King of Prussia, PA 19406-0903
(610) 239-4600
(800) 443-1021 (toll-free)
INVESTMENT ADVISER
EQSF Advisers, Inc.
767 Third Avenue
New York, NY 10017-2023
Independent Accountants
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
CUSTODIAN
Custodial Trust Company
101 Carnegie Center
Princeton, NJ 08540-6231
[GRAPHIC OMITTED]
THIRD AVENUE FUNDS
767 THIRD AVENUE
NEW YORK, NY 10017-2023
PHONE (212) 888-5222
TOLL FREE (800) 443-1021
FAX (212) 888-6757
www.thirdavenuefunds.com
