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THIRD AVENUE VALUE FUND
THIRD AVENUE SMALL-CAP VALUE FUND
THIRD AVENUE REAL ESTATE VALUE FUND
ANNUAL REPORT
-------------
October 31, 1999
<PAGE>
THIRD AVENUE VALUE FUND
Dear Fellow Shareholders:
On November 26, 1999, Third Avenue Value Fund ("TAVF," "Third Avenue" or the
"Fund") distributed to shareholders of record as of November 24, 42.4(cent) per
TAVF share, all of which distribution, whether received in cash or reinvested in
TAVF Common Stock, represented long-term capital gains. We do not anticipate any
further capital gains distributions for fiscal 1999; the Fund did not generate
any investment income for tax purposes. Third Avenue management attempts to
follow tax effective policies for Fund shareholders who pay United States income
taxes. The Fund seems to have been quite tax effective in the fiscal year ended
October 31, 1999.
At October 31, 1999, the audited net asset value, as adjusted for the 42.4(cent)
distribution made in November 1999, attributable to the 38,490,806 TAVF common
shares was $34.40 per share. This compares with an adjusted, unaudited net asset
value of $33.36 per share at July 31, 1999 and an adjusted, audited net asset
value of $29.34 per share at October 31, 1998. At December 13, 1999, the
unaudited net asset value was $33.71 per share.
The Fund's net asset value per share appreciated by 16.9% during the fiscal
year, probably comparing favorably with most relevant benchmarks. TAVF's
performance, though, lagged considerably behind the performance of those groups
most popular in the general market; to wit, the common stocks of large
well-known companies - the "Nifty Fifty," or as one of the TAVF directors
pointed out, the "Nifty Ten" - and the common stocks of highly speculative
issues in industries generally regarded as growth industries which raised funds
in relatively recent Initial Public Offerings ("IPOs"); to wit, internet issuers
and companies generally identified as internet related.
QUARTERLY ACTIVITY
The dominant activity during the last quarter continued to be the sales of
portfolio securities to meet redemptions, and to realize capital losses in order
to minimize income tax bills for Fund shareholders. The common capitalization of
TAVF, as measured by shares outstanding, shrunk by 4.6% during the three-month
interim.
The Fund acquired four new common stock positions during the quarter of which
one, HomeFed Corporation, was a spin-off from Leucadia National Corporation.
Five positions were increased and twelve positions were either eliminated or
reduced. With the exception of Hologic, Inc. Common Stock and Sbarro, Inc.
Common Stock, none of the other securities would have been sold were it not
advisable to do so in order to raise cash to meet redemptions and to take tax
losses. Hologic Common was sold because I suspect a permanent impairment of
capital may be taking place. Sbarro went private; the Fund had an arbitrage
position in Sbarro Common, which worked out quite well.
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<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
OR
NUMBER OF SHARES NEW POSITIONS ACQUIRED
<S> <C>
100,000 shares Covance Inc. Common Stock ("Covance Common")
473,489 shares HomeFed Corp. Common Stock ("HomeFed Common")
55,000 shares Parexel International Corp. Common Stock ("PAREXEL Common")
73,000 shares Pharmaceutical Product Development, Inc. Common Stock
("PPD Common")
INCREASES IN EXISTING POSITIONS
$25,400,000 Hechinger Co. Senior Notes ("Hechinger Senior Notes")
$5,015,000 Innovative Clinical Solutions, Ltd.
6.75% Subordinated Debentures due 6/15/03
("ICSL Subordinates")
$190,000 Insurance Partners II Equity Fund, LP
("Insurance Partners LP Interests")
70,000 shares First American Financial Corp. Common Stock ("FAF Common")
100,000 shares LaSalle Re Holdings, Ltd. Common Stock
("LaSalle Common")
REDUCTIONS IN EXISTING POSITIONS
$58,427,908 Montgomery Ward Unsecured Obligations
("Montgomery Ward Debt")
45,000 shares Cummins Engine Co., Inc. Common Stock
("Cummins Common")
500,000 shares FSI International, Inc. Common Stock ("FSI Common")
165,000 shares Planar Systems, Inc. Common Stock ("Planar Common")
125,000 shares Protocol Systems, Inc. Common Stock ("Protocol Common")
500,300 shares Silicon Valley Group, Inc. Common Stock ("Silicon Valley Common")
POSITIONS ELIMINATED
773,000 shares Hologic, Inc. Common Stock ("Hologic Common")
</TABLE>
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<TABLE>
<CAPTION>
PRINCIPAL AMOUNT
OR
NUMBER OF SHARES POSITIONS ELIMINATED (CONTINUED)
<S> <C>
376,800 shares Leucadia National Corp. Common Stock
("Leucadia Common")
197,200 shares Sbarro, Inc. Common Stock ("Sbarro Common")
1,425,100 shares SpeedFam-IPEC, Inc. Common Stock ("SpeedFam Common")
612,000 shares Texas Micro, Inc. Common Stock ("Texas Micro Common")
5,242,000 shares The Nissan Fire and Marine Insurance Co., Ltd. Common Stock
("Nissan Common")
</TABLE>
ICSL, a clinical research organization ("CRO") company specializing in site
management, seems to be a reasonably promising venture capital-like situation
which, more likely than not, will remain satisfactorily financed until the ICSL
Subordinates mature in June 2003. ICSL, however, will have a much tougher time
developing into a profitable business if it does not recapitalize by exchanging
ICSL Subordinates for ICSL Common Stock. ICSL, however, probably cannot
undertake any meaningful recapitalization without the cooperation of TAVF. TAVF
owns about 50% of the ICSL Subordinates at a cost basis where the yield to
maturity is around 30%. The Fund has had several conversations with ICSL
management about recapitalization but nothing has developed. As part of its ICSL
due diligence, TAVF management examined closely the large, publicly traded,
CROs. These issuers are, by and large, very well financed, and growing extremely
rapidly. The common stocks of these issuers are in the midst of an extreme bear
market. The common stocks of leading companies are currently selling at prices
close to tangible book value, and probably less than ten times earnings for the
forthcoming twelve months. As a consequence, Third Avenue established toehold
positions in Covance Common, Parexel Common and PPD Common, each a leading CRO
company.
The Fund also took advantage of ultra-depressed market conditions to increase
its positions in Hechinger Senior Notes, as well as FAF Common and LaSalle
Common. It is hard to recall a time when common stock prices were as depressed
as they are today for certain specialized property and casualty insurers such as
FAF and LaSalle. TAVF's interest in Insurance Partners LP Interests was
increased pursuant to a call by the General Partner.
DOW 36,000
During the quarter, a new book, DOW 36,000, gained considerable popularity and
notoriety. The basic thesis expounded in the book seems to be genuinely stupid.
However, the historic statistics contained in the book about buy-and-hold
strategies seem quite informative and quite relevant to the Third Avenue
investment style.
The gravamen of DOW 36,000 is that there ought not to be any risk premium built
into prices for equities. The right price for common stocks ought to be at a
level where the total return number approximates the total return number on
performing loans which do not have credit risk. As the authors state, "Market
analysts and media pundits have also
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persistently warned that stocks are extremely risky. About this they are wrong,
too. Over the long term, stocks in the aggregate are less risky than Treasury
bonds or even bank certificates of deposit."
The authors have no conception of what risk is, and what risk is not. As I've
stated in previous letters, an intelligent investor cannot use the word risk
without putting an adjective in front of it; e.g., market risk, investment risk,
credit risk, inflation risk, currency risk, failure to match maturities risk,
etc. All the authors can really say is that in a very special, and probably
rare, case, the total return from common stock investing has exceeded the total
return from investing in credit instruments without credit risk. This special
case occurs where the investor, whether individual or institutional, has a
long-term buy and hold mentality; has paid cash for the investment and has
eschewed borrowing; has no plans whatsoever to sell, or otherwise liquidate
individual securities at any future time; and has as a sole objective total
return with no need or desire for periodic cash returns, from the receipt of
dividends or interest.
The real world is quite different from the authors' special case: Common stocks
obviously carry far more market risk and investment risk than bonds where they
are in the capitalization of an individual issuer; common stocks suffer from
juniority.
Common stocks obviously carry far more market risk than bonds insofar as the
investor would be affected by near-term, intermediate-term and long-term
fluctuations in security prices. Price movements for common stocks are far more
volatile than price movements for performing loans. To use academic language,
common stocks have a much higher BETA than performing loans.
Common stocks carry far more risks of periodic non-payment of cash than bonds
insofar as the investor has as a goal, the realization, in whole or in part, of
periodic cash income from an investment portfolio. Bond interest is a
contractually guaranteed series of payments by an issuer to a holder. Common
stock dividends are frequently a sometime thing.
Insofar as a portfolio is financed by borrowings, a bond portfolio has certain
advantages over a common stock portfolio. First, because the stream of cash
income is more assured, bondholders are in a better position to service the cost
of borrowings than are common stockholders. Second, lenders are willing to lend
more against the collateral of a bond portfolio than against the collateral of a
common stock portfolio. One consequence of this superior borrowing ability is
the Returns on Equity ("ROE") to holders of bond portfolios can be, and often
are, materially greater than the ROEs achievable by holders of common stock
portfolios. Finally, prudence and regulation dictate that where obligations have
to be met at certain times by cash payments -- say for insurance companies,
banks, certain pension plans, or individuals living off the income from
investments -- the portfolios had better be invested all, or mostly all, in
credit obligations.
When securities get markedly overpriced compared with underlying business
values, say Dow 36,000, there tends to be tremendous amounts of new capital
raised. New capital invested in an industry almost always means that there will
be a marked increase in investment risk due to the specter of increased
competition and reduced ROEs for companies engaged in all sorts of operations.
Put simply, at Dow 36,000, companies seem bound to become less profitable
operations than if there had not been available new equity financing at super
prices. The principal asset of a public com-
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pany might well be an ability for a time to raise new capital on a basis that,
for the company, is super-attractive. When and if the super attractive access to
equity markets dries up for companies, it might be disastrous for common
shareholders who bought into those equity markets at Dow 15,000, Dow 20,000, not
to mention Dow 36,000.
Nonetheless, DOW 36,000 makes a pretty strong historical case for buy-and-hold
investing in common stocks. In this sense, DOW 36,000 makes a good case for
Index Funds and also for the TAVF style of buy-and-hold investing. From a
long-term point of view, though, TAVF differs from Index Funds in two important
respects:
1) The Fund tries to restrict common stock investing to companies of
unquestioned staying power. The issuers are well financed and/or seem to have
strong franchises.
2) The Fund tries to buy in at bargain prices, paying a substantial discount
from what analysis shows the business would be worth were it a private company
or a take-over candidate.
WALL STREET'S FLIGHT TO GARBAGE
I woke up a few weeks ago to a dramatic realization that watershed changes had
taken place between 1993 and 1999 in the way most of Wall Street operates. I was
having dinner with a friend who is a stock promoter-venture capitalist. He had
consulted me in 1993 about taking public a start-up venture, marketing products
which, among other things, involved cancer tests; the business had no operating
profits and almost no revenues. In choosing a managing underwriter then to raise
perhaps $8 million, my friend asked me about choosing between DH Blair and Oscar
Gruss, two so-called "shlock" underwriters. The start-up company had little hope
of moving up the underwriting scale in 1993 to, say, Alex Brown or Hambrecht &
Quist; the company was too speculative. My friend said at dinner "I'm currently
involved with a promising venture, a company involved with fuel cells and the
internet. What about a managing underwriter now?" I told him that today you take
these start-ups to "bulge bracket" underwriters such as Goldman Sachs, Morgan
Stanley or Merrill Lynch. Furthermore, the funds to be raised in the IPO amount
to $100 million or $200 million, not $8 million. Boy have times changed!
This flight to garbage, where Goldman Sachs has now usurped the role DH Blair
used to play, seems to have many implications. It has become respectable today
to market new issues of common stocks at fantastic prices where the companies
have no prospects of generating profits from operations for the foreseeable
future.
While I think the probabilities are overwhelming that holders of common stocks
in these speculative issues are likely to lose all, or most, of the moneys they
have invested (if for no other reason than most business plans have to fail
because regardless of the amount of growth in internet demand, this growth in
demand is being dwarfed by the growth in the supply of new competitors), the
substitution of bulge bracket underwriters for shlock underwriters has fostered
a number of changes:
1) These speculative issuers now get a degree of respectability throughout the
country that they never had before.
2) These speculative issuers emerge from the underwriting process far sounder
financially than was formerly the case. This is measured, in part, by the
difference between raising $8 million and raising $100 million.
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3) For most issuers to succeed, they are going to have to continue to raise new
capital in future years. This capital raising merry-go-round is more likely to
continue to exist where the investment banker is a bulge bracket underwriter
than ever was the case with shlock underwriters.
Despite the super-performance of garbage issues in recent years, TAVF will
continue to refuse to invest in such issues at the same prices that the public
is paying. The Fund does invest in venture capital-like growth companies
provided TAVF is able to get into real business situations at prices equal to no
more than a first stage venture capitalist would pay. This is certainly what
TAVF has tried to do in investing in semi-conductor equipment common stocks,
which at October 31, 1999 accounted for 31% of the Fund's portfolio. This is
what the Fund is doing now in establishing toehold positions in the common
stocks of quality CRO companies. TAVF is not going to pay IPO prices for
garbage; Third Avenue certainly has no interest in paying after market (i.e.,
after the IPO) prices either. The elementary truth about TAVF, though, is that
performance records notwithstanding, the guts of the Fund's investment style
will continue to be to buy and hold the securities of well-financed, responsibly
managed issuers.
I will write you again when the report for the period to end January 31, 2000 is
published. Best wishes for a Happy and Prosperous New Year.
Sincerely yours,
/s/Martin J. Whitman
Martin J. Whitman
Chairman of the Board
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS
AT OCTOBER 31, 1999
<TABLE>
<CAPTION>
PRINCIPAL VALUE % OF
AMOUNT ($) ISSUES (NOTE 1) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BANK AND OTHER DEBT - 0.10%
Oil Services 1,200,634 Cimarron Petroleum Corp. (c) (d) $ 1,219,860 0.09%
-------------
Retail 284,760 Lechmere, Inc. Trade Claim (a) (c) 47,839
150,959 Montgomery Ward Trade Claim (a) (c) 41,212
-------------
89,051 0.01%
-------------
TOTAL BANK AND OTHER DEBT
(Cost $1,281,174) 1,308,911
-------------
- ---------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS - 1.83%
Pharmaceutical 49,155,000 Innovative Clinical Solutions, Ltd. 6.75%,
due 6/15/03 24,577,500 1.83%
-------------
Services
TOTAL CONVERTIBLE BONDS
(Cost $23,375,951) 24,577,500
-------------
- ---------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS - 0.83%
Bermuda Based
Financial 7,500,000 CGA Special Account Trust (b) (c) 7,500,000 0.56%
-------------
Institutions
Industrial 8,500,000 Hechinger Co. 9.45%, due 11/15/12 * 935,000
24,900,000 Hechinger Co. 6.95%, due 10/15/03 * 2,739,000
-------------
3,674,000 0.27%
-------------
TOTAL CORPORATE BONDS
(Cost $11,089,035) 11,174,000
-------------
SHARES
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS - 91.44%
Annuities & Mutual
Fund 163,300 John Nuveen & Co., Inc. Class A 5,837,975
Management & Sales 518,600 Liberty Financial Companies, Inc. 12,478,812
-------------
18,316,787 1.37%
-------------
Apparel Manufacturers 150,000 Kleinerts, Inc. (a) (c) 1,800,000 0.13%
-------------
Bermuda Based 3,341,703 CGA Group, Ltd. (a) (b) (c) 0
Financial
Institutions 91,999 Cobalt Holdings, LLC (c) 920
118,449 ESG Re, Ltd. (a) (c) 917,980
210,917 LaSalle Re Holdings, Ltd. 2,728,739
1,064,516 St. George Holdings, Ltd. Class A (a) (b) (c) 106,451
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
7
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS
AT OCTOBER 31, 1999
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS (CONTINUED)
<S> <C> <C> <C>
Bermuda Based
Financial
Institutions 9,044 St. George Holdings, Ltd. Class B (a) (b) (c) $ 905
(continued) -------------
3,754,995 0.28%
-------------
Building Products 123,900 Cummins Engine Co., Inc. 6,280,181
& Related 125,400 Tecumseh Products Co. Class A (b) 6,011,362
417,300 Tecumseh Products Co. Class B (b) 18,361,200
-------------
30,652,743 2.29%
-------------
Business Development 72,445 Capital Southwest Corp. 4,826,648 0.36%
-------------
Companies
Computerized Trading 223,600 Investment Technology Group, Inc. 5,897,450 0.44%
-------------
Computers, Networks 100,000 3Com Corp. (a) 2,900,000 0.22%
-------------
& Software
Depository
Institutions 53,000 Astoria Financial Corp. 1,908,000
218,500 Carver Bancorp, Inc. (b) 1,556,813
39,500 CNY Financial Corp. 612,250
61,543 Commercial Federal Corp. 1,207,781
197,307 Golden State Bancorp., Inc. (a) 4,118,784
53,480 Golden State Bancorp., Inc. Warrants,
9/17/00 (a) 558,197
197,307 Golden State Bancorp, Inc. Litigation Tracking
Warrants (a)197,307
60,000 Letchworth Independent Bancshares Corp. 1,177,500
69,566 Peoples Heritage Financial Group, Inc. 1,321,754
-------------
12,658,386 0.94%
-------------
Financial Insurance 200,000 Ambac Financial Group, Inc. 11,950,000
133,900 Capital Re Corp. 1,891,338
608,500 Enhance Financial Services Group, Inc. 11,105,125
1,000,000 Financial Security Assurance Holdings, Ltd. 56,375,000
394,673 MBIA Inc. 22,521,028
-------------
103,842,491 7.75%
-------------
Food Manufacturers 328,000 J & J Snack Foods Corp. (a) 6,314,000
& Purveyors 109,100 Weis Markets, Inc. 3,620,756
-------------
9,934,756 0.74%
-------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
8
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT OCTOBER 31, 1999
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS (CONTINUED)
<S> <C> <C> <C>
Industrial Equipment 215,100 Alamo Group, Inc. $ 1,774,575 0.13%
-------------
Industrial - Japan 2,200,000 Toyoda Automatic Loom Works, Ltd. 42,831,112 3.20%
-------------
Insurance Holding 200,678 ACMAT Corp. Class A (a) (b) 1,856,272
Companies 803,669 Danielson Holding Corp. (a) (b) (c) 4,520,638
432,300 Risk Capital Holdings, Inc. (a) 5,646,919
5,490 Sen-Tech International Holdings, Inc. (a) (c) 3,294,000
50,000 White Mountains Insurance Group Inc. 6,325,000
-------------
21,642,829 1.61%
-------------
Manufactured Housing 89,000 Liberty Homes, Inc. Class A 611,875
40,000 Liberty Homes, Inc. Class B 315,000
-------------
926,875 0.07%
-------------
Medical Supplies 145,500 Analogic Corp. 3,819,375
& Services 342,300 Datascope Corp. (a) 12,322,800
554,950 Prime Medical Services, Inc. (a) 5,480,131
788,900 Protocol Systems, Inc. (a) (b) 5,620,913
90,750 St. Jude Medical, Inc. (a) 2,484,281
-------------
29,727,500 2.22%
-------------
Natural Resources & 1,160,000 Alexander & Baldwin, Inc. 27,840,000
Real Estate 179,600 Catellus Development Corp. (a) 2,110,300
31,000 Consolidated-Tomoka Land Co. 383,625
550,000 Forest City Enterprises, Inc. Class A 13,750,000
7,500 Forest City Enterprises, Inc. Class B 206,250
473,489 HomeFed Corp. (a) 414,303
955,000 Imperial Credit Commercial Mortgage
Investment Corp. 10,385,625
1,180,336 Koger Equity, Inc. 18,295,208
14,600 LNR Property Corp. 282,875
846 Public Storage, Inc. 20,410
238,200 St. Joe Co. 5,687,025
3,045,508 Tejon Ranch Co. (b) (c) 81,848,027
-------------
161,223,648 12.03%
-------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
9
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT OCTOBER 31, 1999
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONTINUED)
Non-Life Insurance-Japan
7,319,000 Mitsui Marine & Fire Insurance Co., Ltd. $ 48,503,203
6,056,000 The Chiyoda Fire & Marine Insurance Co., Ltd. 22,941,594
3,246,000 The Sumitomo Marine & Fire Insurance Co., Ltd. (a) 25,060,228
1,020,800 The Tokio Marine & Fire Insurance Co., Ltd.,
Sponsored ADR 66,352,000
3,000,000 The Yasuda Fire & Marine Insurance Co., Ltd. 20,312,650
-------------
183,169,675 13.67%
-------------
Oil Services 500,000 Nabors Industries, Inc. (a) 11,343,750 0.85%
-------------
Paper & Related 126,605,679 Repap Enterprises Inc. (a) (b) 7,089,918 0.53%
Products
Pharmaceutical
Services 100,000 Covance Inc. (a) 968,750
55,000 PAREXEL International Corp. (a) 525,938
73,000 Pharmaceutical Product Development, Inc. (a) 734,563
-------------
2,229,251 0.17%
-------------
Security Brokers, 223,600 Jefferies Group, Inc. 4,765,475
Dealers & 893,332 Legg Mason, Inc. 32,494,951
Flotation Companies 1,086,250 Raymond James Financial, Inc. 21,996,562
-------------
59,256,988 4.42%
-------------
Semiconductor 400,000 Applied Materials, Inc. (a) 35,925,000
Equipment
Manufacturers 1,748,000 AVX Corp. 69,920,000
and Related 1,004,500 C.P. Clare Corp. (a) (b) 5,336,406
1,600,300 Electro Scientific Industries, Inc. (a) (b) 86,416,200
1,882,500 Electroglas, Inc. (a) (b) 51,945,234
2,320,900 FSI International, Inc. (a) (b) 18,567,200
631,700 GaSonics International Corp. (a) 10,580,975
369,200 KLA-Tencor Corp. (a) 29,236,025
376,400 Lam Research Corp. (a) 31,782,275
300,000 Photronics, Inc. (a) 6,281,250
3,734,500 Silicon Valley Group, Inc. (a) (b) 46,681,250
663,200 Veeco Instruments, Inc. (a) 22,507,350
-------------
415,179,165 30.98%
-------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
10
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT OCTOBER 31, 1999
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS AND
WARRANTS (CONTINUED)
Small-Cap Technology 108,750 AFC Cable Systems, Inc. (a) $ 4,091,719
230,000 Evans & Sutherland Computer Corp. (a) 2,745,625
424,000 Hypercom Corp. (a) 3,392,000
154,800 Integrated Systems, Inc. (a) 2,602,575
247,200 Planar Systems, Inc. (a) 1,313,250
306,900 Vertex Communications Corp. (a) (b) 4,776,131
-------------
18,921,300 1.41%
-------------
Title Insurance 3,145,000 First American Financial Corp. 46,585,313
1,951,400 Stewart Information Services Corp. (b) 29,027,075
-------------
75,612,388 5.64%
-------------
TOTAL COMMON STOCKS AND WARRANTS
(Cost $793,468,709) 1,225,513,230
-------------
- ---------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK - 1.65%
Bermuda Based 601,554 CGA Group, Ltd., Series A (b) (c) 15,038,851
Financial Institutions6,045,667 CGA Group, Ltd., Series C (b) (c) 7,039,176
-------------
22,078,027 1.65%
-------------
Insurance Companies 4,775 Ecclesiastical Insurance, 8.625% 9,377 0.00%
-------------
TOTAL PREFERRED STOCK
(Cost $19,864,204) 22,087,404
-------------
SHARES OR
INVESTMENT
AMOUNT
- ---------------------------------------------------------------------------------------------------------------------------
LIMITED PARTNERSHIPS - 1.52%
Bermuda Based $2,215,000 ESG Partners, LP (c) 871,735 0.07%
-------------
Financial Institutions
Financial Insurance$15,000,000 American Capital Access Holdings, LLC (c) 15,000,000
$760,000 Insurance Partners II Equity Fund, LP (c) 760,000
-------------
15,760,000 1.18%
-------------
Insurance Holding $3,667,341 Head Insurance Investors LP (c) 3,667,341
Companies 100 HIPI Holdings, Inc. (c) 0
-------------
3,667,341 0.27%
-------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
11
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT OCTOBER 31, 1999
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LIMITED PARTNERSHIPS (CONTINUED)
TOTAL LIMITED PARTNERSHIPS
(Cost $22,965,789) $ 20,299,076
-------------
NOTIONAL
PRINCIPAL
- ---------------------------------------------------------------------------------------------------------------------------
OTHER INVESTMENTS - (0.01%)
Foreign Currency
Swap $90,000,000 Bear Stearns Currency Swap,
Contracts Termination Date 4/22/00 (c) (e) (546,632)
$50,000,000 Bear Stearns Currency Swap,
Termination Date10/27/00(c) (f) 393,237
-------------
(153,395) -0.01%
Foreign Option $15,000,000 Japanese Yen January 2000 Put Options (c) (g) 4,313 0.00%
-------------
Contracts TOTAL OTHER INVESTMENTS
(Cost $399,000) (149,082)
-------------
PRINCIPAL
AMOUNT
- ---------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS - 2.51%
Repurchase
Agreements $32,503,407 Bear Stearns 5.23% due date
November 1, 1999 (h) 32,503,407 2.42%
-------------
U.S. Treasury Bills $1,193,000 U.S. Treasury Bill 4.39%, 11/12/99 (i) 1,191,438 0.09%
TOTAL SHORT TERM INVESTMENTS
(Cost $33,694,845) 33,694,845
-------------
TOTAL INVESTMENT PORTFOLIO - 99.87%
(Cost $906,138,707) 1,338,505,884
-------------
OTHER ASSETS
LESS LIABILITIES - 0.13% 1,765,989
-------------
NET ASSETS - 100.00%
(Applicable to 38,490,806
shares outstanding) $1,340,271,873
==============
</TABLE>
Notes:
(a) Non-income producing securities.
(b) Affiliated issuers-as defined under the Investment Company Act of 1940. (c)
Restricted/fair valued securities. (d) Interest accrued at a current
rate of prime + 2%.
(e) The Fund is selling 9.5 billion Yen and paying an interest rate of 0.22% in
exchange for 90 million U.S. Dollars and an interest rate of 5.18%.
(f) The Fund is selling 5.2 billion Yen and paying an interest rate of 0.22% in
exchange for 50 million U.S. Dollars and an interest rate of 6.29%.
(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.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
12
<PAGE>
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT OCTOBER 31, 1999
(h) Repurchase agreement collateralized by:
U.S. Treasury Strips, par value $18,240,000, 6.19%, matures 08/15/05:
market value $12,796,454
U.S. Treasury Strips, par value $14,000,000, 6.35%, matures 11/15/08:
market value $7,914,340.
U.S. Treasury Strips, par value $29,450,000, 6.47%, matures 02/15/22:
market value $6,957,562.
U.S. Treasury Strips, par value $29,655,000, 6.29%, matures 11/15/26:
market value $5,486,175.
(i) Security segregated for future Fund commitments. * Issuer in default.
ADR: American Depository Receipt.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
13
<PAGE>
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1999
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments at value (Notes 1 and 4):
Unaffiliated issuers (identified cost of $590,274,522) $ 939,205,862
Affiliated issuers (identified cost of $315,864,185) 399,300,022
------------
Total investments (identified cost of $906,138,707) 1,338,505,884
Receivable for securities sold 1,099,893
Receivable for fund shares sold 2,224,258
Dividends and interest receivable 5,388,370
Other assets 48,795
------------
Total assets 1,347,267,200
------------
LIABILITIES:
Payable for securities purchased 706,836
Payable for fund shares redeemed 4,872,684
Payable to investment adviser 977,984
Accounts payable and accrued expenses 372,868
Payable for service fees (Note 3) 64,955
Commitments (Note 6) --
------------
Total liabilities 6,995,327
------------
Net assets $1,340,271,873
==============
SUMMARY OF NET ASSETS:
Common stock, unlimited shares authorized, no par value,
38,490,806 shares outstanding $ 878,105,923
Accumulated undistributed net investment income 308,571
Accumulated undistributed net realized gains from
investment transactions 29,490,388
Net unrealized appreciation of investments and translation of foreign currency
denominated assets and liabilities 432,366,991
------------
Net assets applicable to capital shares outstanding $1,340,271,873
============
Net asset value, offering and redemption price per share $34.82
======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
14
<PAGE>
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1999
<TABLE>
<CAPTION>
<S> <C>
INVESTMENT INCOME:
Interest-unaffiliated issuers $ 10,153,104
Interest-affiliated issuers 356,199
Dividends-unaffiliated issuers (net of foreign withholding tax of $270,582) 18,274,460
Dividends-affiliated issuers 4,850,956
Other income 107,655
------------
Total Investment Income 33,742,374
------------
EXPENSES:
Investment advisory fees (Note 3) 12,805,667
Transfer agent fees 882,804
Service fees (Note 3) 713,283
Reports to shareholders 317,137
Administration fees (Note 3) 245,965
Custodian fees 126,607
Accounting services 117,044
Miscellaneous expenses 93,126
Insurance expenses 81,872
Auditing and tax consulting fees 65,757
Directors' fees and expenses 61,478
Legal fees 59,129
Registration fees 51,843
------------
Total operating expenses 15,621,712
------------
Net investment income 18,120,662
------------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gains on investments-unaffiliated issuers 73,612,251
Net realized losses on investments-affiliated issuers (25,736,873)
Net realized losses on foreign currency transactions (21,743,326)
Net change in unrealized appreciation on investments 174,211,595
Net change in unrealized depreciation on foreign currency swaps and option contracts (204,327)
Net change in unrealized depreciation on translation of other assets and liabilities
denominated in foreign currency (19,024)
------------
Net realized and unrealized gains on investments 200,120,296
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $218,240,958
============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
15
<PAGE>
[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR YEAR
ENDED ENDED
10/31/99 10/31/98
----------- -----------
<S> <C> <C>
OPERATIONS:
Net investment income $ 18,120,662 $ 25,313,637
Net realized gains (losses) on investments-unaffiliated issuers 73,612,251 (38,668,472)
Net realized gains (losses) on investments-affiliated issuers (25,736,873) 20,587,312
Net realized gains (losses) on foreign currency transactions (21,743,326) 2,393,487
Net change in unrealized appreciation (depreciation) on investments 174,211,595 (81,803,887)
Net change in unrealized depreciation on foreign currency swaps and
option contracts (204,327) (343,755)
Net change in unrealized depreciation on translation of other
assets and liabilities denominated in foreign currency (19,024) (2,686,163)
-------------- --------------
Net increase (decrease) in net assets resulting from operations 218,240,958 (75,207,841)
-------------- --------------
DISTRIBUTIONS:
Dividends to shareholders from net investment income (19,923,268) (21,900,312)
Distributions to shareholders from net realized gains on investments -- (8,575,897)
-------------- --------------
(19,923,268) (30,476,209)
-------------- --------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares 237,803,848 626,685,681
Net asset value of shares issued in reinvestment of
dividends and distributions 18,679,630 27,594,318
Cost of shares redeemed (655,240,361) (654,125,198)
-------------- ---------------
Net increase (decrease) in net assets resulting from capital
share transactions (398,756,883) 154,801
-------------- --------------
Net decrease in net assets (200,439,193) (105,529,249)
Net assets at beginning of period 1,540,711,066 1,646,240,315
-------------- --------------
Net assets at end of period
(including undistributed net investment income of
$308,571 and $17,623,734, respectively) $1,340,271,873 $1,540,711,066
============== ==============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
16
<PAGE>
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD) AND RATIOS ARE AS
FOLLOWS:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $30.16 $31.94 $24.26 $21.53 $18.01
------ ------ ------ ------ ------
Income (loss) from Investment Operations:
Net investment income .47 .48 .48 .53 .38
Net gain (loss) on securities (both
realized and unrealized) 4.59 (1.69) 7.92 2.76 3.53
------ ------ ------ ------ ------
Total from Investment Operations 5.06 (1.21) 8.40 3.29 3.91
------ ------ ------ ------ ------
Less Distributions:
Dividends from net investment income (.40) (.41) (.57) (.41) (.25)
Distributions from realized gains -- (.16) (.15) (.15) (.14)
------ ------ ------ ------ ------
Total Distributions (.40) (.57) (.72) (.56) (.39)
------ ------ ------ ------ ------
Net Asset Value, End of Period $34.82 $30.16 $31.94 $24.26 $21.53
====== ====== ====== ====== ======
Total Return 16.89% (3.86%) 35.31% 15.55% 22.31%
Ratios/Supplemental Data:
Net Assets, End of period
(in thousands) $1,340,272 $1,540,711 $1,646,240 $566,847 $312,722
Ratio of Expenses to Average Net Assets 1.10% 1.08% 1.13% 1.21% 1.25%
Ratio of Net Income to Average Net Assets 1.27% 1.44% 2.10% 2.67% 2.24%
Portfolio Turnover Rate 5% 24% 10% 14% 15%
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
17
<PAGE>
[LOGO]
PERFORMANCE INFORMATION
(UNAUDITED)
PERFORMANCE ILLUSTRATIONS
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
THIRD AVENUE VALUE FUND AND THE STANDARD & POOR'S 500 INDEX (S&P 500)
<TABLE>
<CAPTION>
Average Annual Total Return
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year
16.89% 6.01% 14.99% 15.12% 16.52% 14.07% 17.14% 15.75% 19.06%
</TABLE>
[CHART]
As with all mutual funds, past performance does not indicate future results.
18
<PAGE>
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THIRD AVENUE SMALL-CAP VALUE FUND
Dear Fellow Shareholders:
At October 31, 1999, the end of our fiscal year, the audited net asset value
attributable to the 10,761,465 common shares outstanding of Third Avenue
Small-Cap Value Fund ("Small-Cap Value" or the "Fund") was $11.33 per share,
compared with the Fund's unaudited net asset value of $11.64 per share at July
31, 1999. At December 13, 1999, the unaudited net asset value was $12.21.
QUARTERLY ACTIVITY
During the quarter, Small-Cap Value established no new positions, added to six
of its 36 existing positions, and reduced or eliminated its holdings in seven
companies. At October 31, 1999, Small-Cap Value held positions in 34 companies,
the top 10 positions of which accounted for approximately 45% of the Fund's net
assets.
During the past year, the Fund's shares outstanding - one of management's
measures of fund growth - shrunk by 18%. Most of the shrinkage occurred during
the October quarter. With one exception, the sales of portfolio positions during
the quarter stemmed from the Fund's desire to maintain reasonable cash levels in
the face of modest redemptions, and to minimize adverse tax consequences for
Fund shareholders.
<TABLE>
<CAPTION>
<S> <C>
NUMBER OF SHARES INCREASES IN EXISTING POSITIONS
4,400 Alamo Group, Inc. Common Stock ("Alamo Common")
20,800 Act Networks, Inc. Common Stock ("ACT Common")
10,900 Evans & Sutherland Computer Corp. Common Stock ("E&S Common")
28,300 First American Financial Corp. Common Stock ("First American Common")
19,500 LaSalle Re Holdings, Ltd. Common Stock ("LaSalle Common")
5,498 MBIA Inc. Common Stock ("MBIA Common")
DECREASES IN EXISTING POSITIONS
78,500 Avatar Holdings, Inc. Common Stock ("Avatar Common")
65,200 Silicon Valley Group, Inc. Common Stock ("SVG Common")
110,200 SpeedFam-IPEC, Inc. Common Stock ("SpeedFam Common")
POSITIONS ELIMINATED
135,800 Capital Re Corp. Common Stock ("Capital Re Common")
68,000 Hologic, Inc. Common Stock ("Hologic Common")
</TABLE>
19
<PAGE>
[LOGO]
<TABLE>
<CAPTION>
NUMBER OF SHARES POSITIONS ELIMINATED (CONTINUED)
<S> <C>
101,500 Rofin-Sinar Technologies, Inc. Common Stock ("Rofin-Sinar Common")
108,400 Xircom, Inc. Common Stock ("Xircom Common")
</TABLE>
Our semi-annual report of April, 1999, the date that coincided with the Fund's
second anniversary, addressed some of the issues contributing to the Fund's
lagging performance. In this letter, I try to expand a bit on April's report,
offering a few examples of why we continue to like those holdings that have
probably contributed the most to that performance.
Small-Cap Value Fund owns large positions in real estate and insurance company
common stocks - in aggregate, about 46% of Fund assets - both of which came
under increasingly negative pressure during much of 1999, and which remain
rather unpopular today. One of those insurance company common stocks, MBIA
Common, is one of the Fund's largest holdings, and is down nearly 30% from its
May 1999 high. Perceptions (or misperceptions) about higher interest rates, a
slowdown in municipal and asset-backed securities issuance in the latter half of
this year, and abnormal reserving activity evidently convinced many short-term
oriented investors that the business was permanently damaged. At current levels,
I think MBIA Common sells near those depressed levels recorded during the Orange
County Bankruptcy in 1994 and Philadelphia's financing crisis in 1990.
MBIA is the largest company within the financial guarantee industry, a business
characterized by high barriers to entry, reasonably high quality and predictable
earnings, attractive returns on equity and solid growth prospects. As
importantly, the industry is populated by conservative management teams and
rational competitors. It's a company that has compounded shareholder value - as
measured by adjusted book value, a decent proxy for economic value - by 14% to
15% annually for the last 10 years. We continue to believe that MBIA's
"problems" are ephemeral in nature and do not represent any form of permanent
setback. We bought what we could during the year's downdrafts and view the
current pessimism as a good opportunity to add to our holdings.
Most of our real estate holdings continue to build business value, reflecting
positive occupancy and lease trends and exciting pipeline activity. The stock
prices of our holdings, however, make it clear that the investing public at
large couldn't care less about owning real estate securities.
With a few bright exceptions, the Fund's significant positions in small
technology companies also lagged. In certain cases, these companies remain in
transition stages that have taken longer than anticipated to realize. Some of
these issues appear to be strengthening as I write this letter.
Finally, Small-Cap Value's largest position by cost, Nissan Fire and Marine
Common Stock, has similarly weighed negatively on the Fund's performance. This
position alone accounts for an unrealized loss of approximately $0.25 to $0.30
per Fund share, not at all immaterial in the scheme of things. Nevertheless, we
can remain optimistic holding one of the best reserved and cheapest of the
Japanese P&C companies. Nissan has recently begun buying back modest amounts of
its common stock, an almost unheard of activity for the Japanese as recently as
one year ago. It is also worth noting that the Japanese insurance industry has
recently experienced a strengthening consolidation theme. Axa and Aetna, eager
to further penetrate the second largest insurance market in the world, both
recently announced deals in
20
<PAGE>
[LOGO]
Japan, while some of Nissan's competitors announced a three-way partnership. Is
Nissan neglected, misunderstood or ignored? Perhaps. In trouble? Hardly. Are
these developments positive from a shareholder perspective? Absolutely.
We remain confident in our existing portfolio holdings and are adding to those
positions as cash flows allow. We have let go of holdings with deteriorating
business fundamentals, and continue to hold the bar high with respect to any new
portfolio additions. Looking forward, Small-Cap Value retains two important
positive characteristics: 1) a low price-to-value ratio, as measured by the
market value of the Fund's holdings relative to company business values; and 2)
an attractive tax attribute in the form of an unrealized loss, available to
improve future after-tax returns.
I look forward to writing you again when we publish our First Quarter Report
dated January 31, 2000. All the best for the Holidays and the New Year.
Sincerely,
/s/
Curtis R. Jensen
Co-manager, Third Avenue Small-Cap Value Fund
21
<PAGE>
[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT OCTOBER 31, 1999
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS - 95.06%
Bermuda Based
Financial
Institutions 119,000 LaSalle Re Holdings, Ltd. $ 1,539,563 1.26%
-----------
Construction-Japan 431,900 Sawako Corp., Sponsored ADR 2,267,475 1.86%
-----------
Financial Insurance 60,300 Financial Security Assurance Holdings Ltd. 3,399,413
118,822 MBIA Inc. 6,780,280
-----------
10,179,693 8.35%
-----------
Industrial Equipment 291,000 Alamo Group, Inc. 2,400,750
161,600 Gleason Corp. (b) 2,807,800
-----------
5,208,550 4.27%
-----------
Life Insurance 179,000 FBL Financial Group, Inc. Class A 3,277,938 2.69%
-----------
Manufactured Housing 184,300 Skyline Corp. 4,584,463 3.76%
-----------
Media 139,700 ValueVision International, Inc. Class A (a) 4,566,444 3.75%
-----------
Medical Supplies 278,000 Protocol Systems, Inc. (a) 1,980,750 1.62%
& Services -----------
Natural Resources & 187,500 Alexander & Baldwin, Inc. 4,500,000
Real Estate 241,400 Alico, Inc. 3,711,525
160,000 Avatar Holdings, Inc. (a) (b) 3,000,000
126,900 Cabot Industrial Trust 2,538,000
234,300 Deltic Timber Corp. (b) 5,257,106
206,000 Koger Equity, Inc. 3,193,000
200,000 Tejon Ranch Co. (d) 5,375,000
1,104,700 The TimberWest Forest Corp. (Canada) 7,432,232
-----------
35,006,863 28.72%
-----------
Non-Life 2,425,000 The Nissan Fire & Marine
Insurance-Japan Insurance Co., Ltd. 8,372,494 6.87%
-----------
Paper & Related 13,000,000 Repap Enterprises Inc. (a) 728,000 0.60%
Products -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
22
<PAGE>
[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT OCTOBER 31, 1999
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS (CONTINUED)
Retail 426,100 HomeBase, Inc. (a) (b) $ 1,624,506
261,700 Value City Department Stores, Inc. (a) 4,023,637
------------
5,648,143 4.63%
------------
Semiconductor 520,000 C.P. Clare Corp. (a) (c) 2,762,500
Equipment Manufacturers154,500 Electroglas, Inc. (a) 4,263,234
and Related 417,400 FSI International, Inc. (a) 3,339,200
99,000 Silicon Valley Group, Inc. (a) 1,237,500
199,000 SpeedFam-IPEC, Inc. (a) 2,201,438
------------
13,803,872 11.32%
------------
Technology 295,800 ACT Networks, Inc. (a) 1,922,700
25,000 Bel Fuse, Inc. Class A (a) 995,313
40,700 Bel Fuse, Inc. Class B (a) 1,409,237
326,900 Centigram Communications Corp. (a) (c) 3,105,550
198,300 Evans & Sutherland Computer Corp. (a) 2,367,206
370,300 Planar Systems, Inc. (a) 1,967,219
490,600 SpecTran Corp. (a) (c) 4,354,075
------------
16,121,300 13.23%
------------
Title Insurance 174,800 First American Financial Corp. 2,589,225 2.13%
------------
TOTAL COMMON STOCKS
(Cost $127,446,482) 115,874,773
------------
NOTIONAL
PRINCIPAL
- ---------------------------------------------------------------------------------------------------------------------------
OTHER INVESTMENTS - 0.00%
Foreign Option
Contracts $6,500,000 Japanese Yen February 2000 Put Options (d) (e) 1,950 0.00%
-----------
TOTAL OTHER INVESTMENTS
(Cost $217,750) 1,950
-----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
23
<PAGE>
[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT OCTOBER 31, 1999
<TABLE>
<CAPTION>
PRINCIPAL VALUE % OF
AMOUNT ISSUES (NOTE 1) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS - 2.88%
<S> <C> <C> <C>
Repurchase Agreements$3,504,588 Bear Stearns 5.23%, due date November 1, 1999 (f) 3,504,588 2.88%
-----------
TOTAL SHORT TERM INVESTMENTS
(Cost $3,504,588) 3,504,588
-----------
TOTAL INVESTMENT PORTFOLIO - 97.94%
(Cost $131,168,820) 119,381,311
-----------
OTHER ASSETS
LESS LIABILITIES - 2.06% 2,513,700
-----------
NET ASSETS - 100.00% $121,895,011
===========
(Applicable to 10,761,465
shares outstanding)
</TABLE>
Notes:
(a) Non-income producing securities.
(b) Securities in whole or in part on loan.
(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) 6.5 million U.S. Dollar notional amount may be exercised on February 23,
2000 to sell 854.8 million Japanese Yen at a strike price of 131.50.
(f) Repurchase agreement collateralized by:
U.S. Treasury Strips, par value $19,325,000, 6.29%, matures 11/15/26:
market value $3,575,125.
ADR: American Depository Receipt.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
24
<PAGE>
[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
STATEMENT OF ASSETS AND LIABILITIES
AT OCTOBER 31, 1999
ASSETS:
Investments at value (Notes 1 and 4):
Unaffiliated issuers (identified cost of $115,204,792) $ 109,159,186
Affiliated issuers (identified cost of $15,964,028) 10,222,125
-----------
Total investments (identified cost of $131,168,820) 119,381,311
Receivable for securities sold 1,372,048
Receivable for fund shares sold 1,253,805
Dividends and interest receivable 387,847
Collateral on loaned securities (Note 1) 4,003,400
Deferred organizational costs (Note 1) 26,230
Other assets 4,380
-----------
Total assets 126,429,021
-----------
LIABILITIES:
Payable for fund shares redeemed 345,738
Payable to investment adviser 90,914
Accounts payable and accrued expenses 86,578
Payable for service fees (Note 3) 7,380
Collateral on loaned securities (Note 1) 4,003,400
-----------
Total liabilities 4,534,010
-----------
Net assets $121,895,011
===========
SUMMARY OF NET ASSETS:
Common stock, unlimited shares authorized, no par value,
10,761,465 shares outstanding $133,093,708
Accumulated undistributed net investment income 748,060
Accumulated undistributed net realized losses from
investment transactions (158,404)
Net unrealized depreciation of investments and translation
of foreign currency denominated assets and liabilities (11,788,353)
-----------
Net assets applicable to capital shares outstanding $ 121,895,011
===========
Net asset value, offering and redemption price per share $11.33
=====
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
25
<PAGE>
[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1999
INVESTMENT INCOME:
Interest $ 635,678
Dividends (net of foreign withholding tax of $145,812) 2,135,164
Other Income 1,726
----------
Total investment income 2,772,568
----------
EXPENSES:
Investment advisory fees (Note 3) 1,247,500
Transfer agent fees 112,456
Service fees (Note 3) 72,420
Administration fees (Note 3) 62,018
Directors' fees and expenses 52,973
Accounting services 46,924
Reports to shareholders 43,253
Auditing and tax consulting fees 36,707
Custodian fees 27,581
Registration fees 24,012
Legal fees 15,320
Amortization of organizational expenses (Note 1) 10,877
Miscellaneous expenses 10,299
Insurance expenses 7,291
----------
Total operating expenses 1,769,631
----------
Net investment income 1,002,937
----------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gains on investments - unaffiliated issuers 841,964
Net realized losses on foreign currency transactions (151,197)
Net change in unrealized appreciation on investments 7,651,526
Net change in unrealized depreciation on foreign
currency option contracts (289,800)
Net change in unrealized appreciation on translation of other
assets and liabilities denominated in foreign currency 2,959
----------
Net realized and unrealized gains on investments 8,055,452
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $9,058,389
==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
26
<PAGE>
[LOGO]
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR YEAR
ENDED ENDED
10/31/99 10/31/98
----------- -----------
OPERATIONS:
<S> <C> <C>
Net investment income $ 1,002,937 $ 996,458
Net realized gains (losses) on investments 841,964 (642,191)
Net realized losses on foreign currency transactions (151,197) (5,424)
Net change in unrealized appreciation (depreciation) on investments 7,651,526 (22,461,400)
Net change in unrealized depreciation on foreign
currency option contracts (289,800) --
Net change in unrealized appreciation on translation of other
assets and liabilities denominated in foreign currency 2,959 70,197
------------ ------------
Net increase (decrease) in net assets resulting from operations 9,058,389 (22,042,360)
------------ ------------
DISTRIBUTIONS:
Dividends to shareholders from net investment income (1,130,515) (565,144)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares 54,380,491 130,078,067
Net asset value of shares issued in reinvestment of
dividends and distributions 1,086,390 547,053
Cost of shares redeemed (81,056,965) (75,716,241)
------------ -------------
Net increase (decrease) in net assets resulting from capital
share transactions (25,590,084) 54,908,879
------------ -------------
Net increase (decrease) in net assets (17,662,210) 32,301,375
Net assets at beginning of period 139,557,221 107,255,846
------------ -------------
Net assets at end of period
(including undistributed net investment income of
$748,060 and $828,935, respectively) $121,895,011 $139,557,221
============ =============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
27
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THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD) AND RATIOS ARE AS
FOLLOWS:
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE
YEAR YEAR PERIOD
ENDED ENDED ENDED
10/31/99 10/31/98 10/31/1997*
----------- ----------- -----------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $10.66 $12.37 $10.00
----- ----- -----
Income (loss) from Investment Operations:
Net investment income .09 .08 .05
Net gain (loss) on securities (both realized
and unrealized) .67 (1.73) 2.32
----- ----- -----
Total from Investment Operations .76 (1.65) 2.37
----- ----- -----
Less Distributions:
Dividends from net investment income (.09) (.06) .00
----- ------ -----
Net Asset Value, End of Period $11.33 $10.66 $12.37
====== ====== ======
Total Return 7.12% (13.36%) 23.70%1
Ratios/Supplemental Data:
Net Assets, End of period (in thousands) $121,895 $139,557 $107,256
Ratio of Expenses to Average Net Assets 1.28% 1.28% 1.65%2
Ratio of Net Income to Average Net Assets 0.72% 0.72% 1.44%2
Portfolio Turnover Rate 10% 6% 7%1
</TABLE>
1 Not Annualized
2 Annualized
* The Fund commenced investment operations April 1, 1997.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
28
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PERFORMANCE INFORMATION
(UNAUDITED)
PERFORMANCE ILLUSTRATIONS
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN
THIRD AVENUE SMALL-CAP VALUE FUND AND THE RUSSELL 2000 INDEX
Average Annual Total Return
Since Inception
1 Year 2 Year (4/1/97)
7.12% -3.67% 5.49%
As with all mutual funds, past performance does not indicate future results.
29
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THIRD AVENUE REAL ESTATE VALUE FUND
Dear Fellow Shareholders:
I am pleased to provide you with Third Avenue Real Estate Value Fund's (the
"Fund") report for the fiscal year ended October 31, 1999 (the Fund's first full
fiscal year of operation since its inception on September 17, 1998). At October
31, 1999, the audited net asset value attributable to the 749,696 shares
outstanding was $11.09 per share. This compared with the Fund's unaudited net
asset value of $11.74 per share at July 31, 1999 and an audited net asset value,
adjusted for subsequent distributions to shareholders, of $10.18 per share at
October 31, 1998. At December 13, 1999, the unaudited net asset value was $10.79
per share.
QUARTERLY ACTIVITY
During the fourth quarter of fiscal 1999, the Fund took advantage of the weak
market for most real estate securities and increased its positions in the common
stocks of 14 companies. The Fund eliminated its position in Chastain Capital
Corp. after the company announced that its board had approved a plan to
liquidate the company. When the Fund acquired its position in Chastain, we
expected the company to either be acquired or liquidated. We decided to sell our
position (at a substantial gain) when the stock price reached a level that
equaled our estimate of liquidation value. At October 31, 1999, the Fund held
positions in 20 companies, and was approximately 92% invested. The Fund's top 10
positions accounted for approximately 61% of the Fund's net assets.
<TABLE>
<CAPTION>
NUMBER OF SHARES INCREASES IN EXISTING POSITIONS
<S> <C>
3,500 Aegis Realty, Inc. ("Aegis Common")
18,400 AMRESCO Capital Trust, Inc. ("Amresco Common")
2,500 Anthracite Capital, Inc. ("Anthracite Common")
26,400 Catellus Development Corp. ("Catellus Common")
3,700 Commercial Assets, Inc. ("Commercial Common")
7,500 First American Financial Corp. ("First American Common")
12,600 Forest City Enterprises, Inc. Class A ("Forest City Common")
5,000 Imperial Credit Commercial Mortgage Investment Corp. ("Imperial Common")
10,000 St. Joe Co. ("St. Joe Common")
5,000 Koger Equity, Inc. ("Koger Common")
3,000 LNR Property Corp. ("LNR Common")
5,200 Prime Group Realty Trust ("Prime Common")
</TABLE>
30
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<TABLE>
<CAPTION>
NUMBER OF SHARES INCREASES IN EXISTING POSITIONS (CONTINUED)
<S> <C>
10,400 United Investors Realty Trust ("United Common")
12,600 Wellsford Real Properties, Inc. ("Wellsford Common")
POSITION ELIMINATED
31,000 Chastain Capital Corp. ("Chastain Common")
</TABLE>
FIRST YEAR RESULTS
Real estate securities, in general, have been out of favor with investors for
the last two years. The following table illustrates the returns on real estate
securities since the inception of the Fund (9/17/98) and for the one year and
two year periods ended October 31, 1999, as evidenced by three total-return
indexes (assumes dividends are reinvested).
<TABLE>
<CAPTION>
SINCE
9/17/98 1 YEAR 2 YEARS
------- ------ ------
<S> <C> <C> <C>
Bloomberg Real Estate Operating Company Index +4.3% -0.4% -19.1%
Morgan Stanley REIT Index -1.0% -6.3% -19.0%
Wilshire Real Estate Securities Index +0.6% -4.8% -18.4%
THIRD AVENUE REAL ESTATE VALUE FUND +11.9% +8.9% N/A
</TABLE>
By observing the poor returns generated by real estate stocks, it would be
natural to draw the conclusion that real estate fundamentals have weakened or,
at least, that the poor stock performance is a harbinger to weaker fundamentals
(e.g., higher vacancies, declining rents, etc.). However, in most areas across
the country, property fundamentals are strong as evidenced by increasing
occupancy levels, stable or increasing rents, decent demand for space, and
little evidence of speculative construction or overbuilding. The disconnect
between real estate fundamentals and real estate stock performance has been a
popular topic of discussion among real estate executives, analysts and
investors. We believe there are two primary factors that lead to the current
situation:
1. REAL ESTATE COMMON STOCKS, ESPECIALLY REAL ESTATE INVESTMENT TRUST (REIT)
COMMON STOCKS, WERE SIGNIFICANTLY OVERPRICED. Two years ago, REIT common
stocks were priced at 25% to 30% premiums over net asset value (NAV). Such
prices were supported by the argument that REIT common stocks should trade
like growth stocks - at multiples of projected earnings (REIT multiples were
applied to "funds from operations") without regard to the value of the REITs'
assets. This argument held up as long as REITs continued to have access to
inexpensive equity capital and REIT stock analysts continued to project
double digit growth in cash flow. However, access to capital and significant
cash flow growth had become mutually dependent. It was inconceivable to us
that this illogical formula could work indefinitely because it gave little
consideration to the value of real estate assets. To wit: if XYZ REIT
purchased an office building in an arms-length transaction for $10 million,
the market
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would immediately value that office building at $12.5 million because XYZ's
common stock was trading at a 25% premium to NAV. With very few exceptions,
we don't believe that real estate common stocks should trade at a premium to
NAV. Most REITs have not demonstrated that they can add significant value to
properties or create economies of scale such that a premium price for their
common stock is warranted. Many REITs do have experienced managements that
are capable of creating and adding value - but that's what managements get
paid to do. The common stock prices of the companies they manage, more often
than not, probably will reflect increases in the value of real estate as it
is achieved, not before.
2. SUPPLY OF REAL ESTATE COMMON STOCKS EXCEEDS DEMAND. From 1994 through 1997,
the real estate markets were in a general state of recovery from the
recession of the early 1990s. The recovery spawned scores of new REITs and
growth of existing REITs as equity capital flowed freely into the sector from
growth investors - not your typical REIT investor. Beginning in late 1997, it
appeared that the real estate industry was fully recovered and that it would
be difficult to maintain such dramatic growth. Additionally, economists were
talking about a possible recession. The prospect that the growth cycle was
coming to an end was enough to prompt growth investors to shift their focus
elsewhere. During the last two years, approximately $75 billion of market
capitalization has left the real estate sector. Purchasing real estate common
stocks today is characterized by the "offer" side of the market being much
more active than the "bid" side. As a result, real estate stock valuations
have dropped dramatically to where, on average, they are now trading below
NAV.
The Fund has taken advantage of bargain prices available during the last year.
We have concentrated our bargain hunting on common stocks of real estate
operating companies and small REITs. The vast majority of REITs are not on our
radar screen because they appear to have limited upside. Even though most REIT
common stocks trade at discounts to NAV, it may be unlikely these REITs will
have access to inexpensive equity capital anytime soon. Without fresh capital,
growth will be restricted. We would rather own common stock in real estate
operating companies that have the proven ability to grow and create wealth
without raising new equity - like Forest City, Avatar, St. Joe and LNR. The
growth prospects and potential for capital appreciation for these companies
seems much more promising than is the case for capital-starved REITs.
REVIEW OF TOP HOLDINGS
The following summary of the Fund's top five holdings (about 37% of the Fund's
net assets) gives a good cross section of the Fund's investments and a fair
representation of our investment style. It is no coincidence that four of the
Fund's top five holdings are common stocks of C-corporations - not REITs. We
believe that the best way to achieve the Fund's objective of long-term capital
appreciation is by investing in well-financed companies that are able to
reinvest their earnings. Real estate is a very capital-intensive business, and
access to inexpensive capital is crucial for real estate companies to grow. The
least expensive form of equity capital is retained earnings. REITs are required
to pay dividends to shareholders of at least 95% of their taxable income,
leaving most REITs with little cash remaining to reinvest in new assets.
Additionally, the market for REIT equity offerings has essentially been shut
down for the last two years. This combination has left previously
growth-oriented REITs in a difficult position with limited growth potential. The
common stocks of real estate operating companies in which the Fund has invested
pay very little or no dividends. With strong balance sheets and no need to raise
equity capital, these companies should generate significant growth that will
32
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outpace REITs over the next few years and in the long run. The common stocks of
REITs in which the Fund has invested were all purchased at significant discounts
to NAV, pay inordinately high dividends, and represent opportunities to take
advantage of the likely consolidation of REITs or other resource conversions
such as liquidations, management buyouts, etc.
Imperial Common (see below) is a good example of our strategy involving the
purchase of REIT common stocks.
IMPERIAL COMMON (9.4%) - Imperial is a REIT that invests primarily in performing
small-balance multifamily and commercial mortgage loans. We started buying
Imperial Common in October 1998 because it was extremely cheap relative to our
estimate of liquidation value, the company's assets were conservatively
financed, the company generated stable cash flow and it was paying an
extraordinarily high (and sustainable) dividend. Our investment in Imperial
Common was a good example of taking advantage of a misunderstood security.
During the fall of 1998, spreads on mortgage-backed and other debt securities
widened to historic levels, resulting in substantial unrealized losses due to
mark-to-market valuation adjustments. Many REITs with highly-leveraged
portfolios of mortgage-backed securities were forced to liquidate holdings to
meet margin calls, and their unrealized losses quickly became realized losses.
Since Imperial had substantially less leverage than most mortgage REITs and its
portfolio was not significantly affected by mark-to-market adjustments, the
company was not subject to margin calls. However, the price of Imperial Common
fell dramatically along with most mortgage REITs as investors exited the sector.
We believed investor fear was unfounded because the losses suffered by mortgage
REITs were the result of mark-to-market adjustments, or "perceived" reductions
in value, and not deterioration of credit quality. In fact, commercial
mortgage-backed securities and their underlying mortgages have continued to
perform extremely well. The Fund's average cost for Imperial Common is
approximately $9.49 per share. Imperial has entered into a merger agreement with
Imperial Credit Industries (a 10% shareholder and the manager of Imperial) and
we expect to be cashed out of our Imperial Common investment in early 2000 for
approximately $11.57 per share, after receiving a dividend return, based on the
Fund's average cost, of approximately 11% per annum.
FOREST CITY COMMON (9.2%) - Forest City is a real estate development and
operating company that develops, owns, operates and manages commercial and
multifamily properties across the United States. Forest City has over $3.6
billion of assets (at cost) which includes 14 regional malls, 27 specialty
retail centers, 24 office buildings, 9 hotels and 114 apartment communities. The
company has an additional 21 projects under construction (total cost $1.1
billion) and 32 projects under development (estimated cost $2.4 billion). Forest
City develops properties with the intention of holding them as long-term
investments. Its unique capital strategy incorporates the use of non-recourse
mortgage financing. 87% of the company's total debt is non-recourse, of which
nearly all is fixed-rate (or hedged) at an average rate of 7.04%. The
combination of operating cash flow plus proceeds from refinancing properties
with non-recourse mortgage debt gives Forest City an advantage over REITs that
are heavily reliant upon access to inexpensive equity capital in order to
sustain growth. Since Forest City is not a REIT, it is not required to pay
dividends and nearly all of the company's cash flow is available to be
reinvested in new assets. Forest City has a 20 year record of consistent cash
flow growth and its common stock is priced at less than a 6 multiple of cash
flow and about a 40% discount to NAV. As Forest City continues to reinvest its
cash flow in well-planned developments, we expect that cash flow and NAV will
continue grow.
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AVATAR COMMON (6.3%) - Avatar is a real estate development company that owns in
excess of 50,000 acres of land primarily in Florida and Arizona. Approximately
20,000 acres in Avatar's primary development communities (three in Florida and
one in Arizona) are developed, partially developed or developable. Nearly all of
this acreage has been platted and/or zoned and either complies with or is exempt
from expensive and time consuming DRI (development of regional impact)
processes. Avatar has owned most of its land for over 30 years at a very low
cost basis. About three years ago, the company brought in new management to
design and implement a comprehensive business plan to develop its core land
holdings and divest non-core assets. The new business plan focuses on developing
and managing active adult communities and developing upscale and semi-custom
homes and communities. Avatar's first active adult community, which will
ultimately include 6,500 homes, is currently under construction on 3,300 acres
located 10 miles south of Disney World. The grand opening should take place
during 2000. Based on the strong Florida demographics for this product type, the
location, and the company's low-cost land base (a competitive advantage), we
expect that the project will be very profitable and a successful springboard for
Avatar's future active adult communities. During 1999, Avatar's homebuilding
division began generating substantial pre-tax profits and its backlog (units
sold but not closed) at the end of the third calendar quarter exceeded total
sales for the prior 12 months. Earlier this year, Avatar sold its Florida water
and wastewater utilities assets for $208.6 million cash, resulting in an
after-tax gain of $90.4 million and net cash proceeds of $164 million.
Additionally, Avatar sold non-core real estate assets in Cape Coral, Florida
which generated net cash proceeds of $37.6 million. These two sales of non-core
assets strengthened Avatar's already healthy balance sheet. Currently, Avatar
has over $160 million in cash with total debt of only $115 million. Avatar
Common trades at a 20% discount to tangible book value, which is substantially
below our estimate of NAV. With its strong balance sheet and significant
development projects underway, Avatar is in the process of unlocking its
embedded land value and becoming a significant homebuilder in its markets.
ST. JOE COMMON (6.2%) - St. Joe is a diversified company engaged in the real
estate, forestry, transportation and sugar industries. The company is the
largest single private landowner in Florida, with more than 1 million acres. The
company's new management team, with years of development expertise, is
capitalizing on St. Joe's extensive land holdings and transforming the company
into a real estate operating company. This transformation includes the
elimination of St. Joe's non-strategic assets in transportation, forestry and
sugar. The company recently sold its sugar business and farming rights for
$152.5 million cash (recording a gain of $43 million) and has announced that it
intends to sell approximately 800,000 acres of timberlands. St. Joe owns 54% of
Florida East Coast Industries, a publicly-traded company that owns a railroad in
Florida and, through its wholly-owned subsidiary, Gran Central Corporation, owns
a portfolio of 62 office buildings and about 18,000 acres of commercial land.
St. Joe has recently announced that it intends to complete a tax-free spin-off
of its Florida East Coast common shares to St. Joe shareholders. St. Joe is
focusing its attention on its core businesses, including community residential
real estate, residential real estate services, and commercial real estate and
services. St. Joe's core assets include extensive beach-front property, with
over 40 miles of coastline on the Gulf of Mexico on the Florida panhandle, on
which the company is developing large-scale, mixed-use communities. Several
communities are beginning to generate substantial sales and profits, positioning
St. Joe to expand its development activities. St. Joe's strong financial
position, with over $200 million in cash and marketable securities and debt of
only $35 million, gives the company a stable foundation from which it should be
able to create new value and realize the hidden value of its land holdings that
have been owned for over 60 years. As St. Joe implements its business
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plan of selling non-strategic assets and developing its strategic assets,
thereby creating a predictable stream of recurring earnings, we expect the
substantial discount that St. Joe Common trades from our estimate of NAV should
dissipate.
LNR COMMON (5.6%) - LNR is an opportunistic real estate investment and finance
company that is involved in (1) acquiring, developing, managing and
repositioning commercial and multifamily properties and loans, (2) acquiring and
managing portfolios of distressed real estate assets, (3) investing in unrated
and non-investment grade rated commercial mortgage backed securities (CMBS) in
which the company has the right to be special servicer (i.e., conduct collection
and recovery activities upon default of underlying mortgage loans), and (4)
making high yielding real estate loans and equity investments. Real estate
property activities represent approximately 45% of LNR's operating earnings.
LNR's real estate assets consist of approximately 6.2 million square feet of
office, retail industrial and warehouse space, 1.6 million square feet of ground
leases, 1,300 hotel rooms, and 10,800 apartments, either complete or under
development. The company's stabilized operating properties currently generate an
annual yield of approximately 15% on cost, clearly illustrating the substantial
unrealized appreciation in these assets. Investments in CMBS generate
approximately 43% of LNR's operating earnings. LNR has investments in CMBS with
total face amount of approximately $1.2 billion that are carried at a net book
value of $509 million. The CMBS portfolio generates an annual cash yield of
approximately 17% on book value, including a 29% yield on the unrated CMBS.
LNR's expertise at managing these complex financial assets is evidenced by the
fact that the company is the special servicer for 55 CMBS transactions with an
original face amount of almost $42 billion. LNR Common currently trades at less
than a 6 multiple of cash flow and below tangible book value of $19.28. Based on
the substantial unrealized appreciation in LNR's real estate and CMBS assets, we
estimate that NAV exceeds book value by about 60%.
I look forward to writing to you again when we publish our quarterly report for
the period ending January 31, 2000.
Sincerely,
/s/
Michael H. Winer
Co-manager, Third Avenue Real Estate Value Fund
35
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THIRD AVENUE TRUST
THIRD AVENUE REAL ESTATE VALUE FUND
PORTFOLIO OF INVESTMENTS
AT OCTOBER 31, 1999
<TABLE>
<CAPTION>
VALUE % OF
SHARES ISSUES (NOTE 1) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMMON STOCKS - 92.33%
Natural Resources 6,500 Deltic Timber Corp. $ 145,844
4,000 The TimberWest Forest Corp. (Canada) 26,911
----------
172,755 2.08%
----------
Real Estate Development28,000 Avatar Holdings, Inc. (a) 525,000
33,400 Catellus Development Corp. (a) 392,450
9,700 Consolidated-Tomoka Land Co. 120,037
17,400 Echelon International Corp., Inc. (a) 416,512
30,700 Forest City Enterprises, Inc. Class A 767,500
24,000 LNR Property Corp. 465,000
21,500 St. Joe Co. 513,312
45,400 Wellsford Real Properties, Inc. (a) 374,550
----------
3,574,361 43.00%
----------
Real Estate Holding
Company 25,500 Security Capital Group, Inc. (a) 350,625 4.22%
-----------
Real Estate
Investment Trust 42,000 Aegis Realty, Inc. 367,500
26,500 AMRESCO Capital Trust Inc. 231,875
55,000 Anthracite Capital, Inc. 374,688
57,400 Commercial Assets, Inc. 287,000
72,000 Imperial Credit Commercial Mortgage Investment Corp. 783,000
22,000 Koger Equity, Inc. 341,000
24,200 Prime Group Realty Trust 347,875
55,000 United Investors Realty Trust 385,000
-----------
3,117,938 37.51%
-----------
Title Insurance 31,000 First American Financial Corp. 459,188 5.52%
-----------
TOTAL COMMON STOCKS
(Cost $7,669,979) 7,674,867
-----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
36
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THIRD AVENUE TRUST
THIRD AVENUE REAL ESTATE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT OCTOBER 31, 1999
<TABLE>
<CAPTION>
PRINCIPAL VALUE % OF
AMOUNT ISSUES (NOTE 1) NET ASSETS
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT TERM INVESTMENTS - 2.13%
Repurchase Agreements $177,360 Bear Stearns 5.23%, due date November 1, 1999 (b) $ 177,360 2.13%
-----------
TOTAL SHORT TERM INVESTMENTS
(Cost $177,360) 177,360
-----------
TOTAL INVESTMENT PORTFOLIO - 94.46%
(Cost $7,847,339) 7,852,227
-----------
CASH AND OTHER ASSETS
LESS LIABILITIES - 5.54% 460,086
-----------
NET ASSETS - 100.00% $8,312,313
===========
(Applicable to 749,696
shares outstanding)
Notes:
(a) Non-income producing securities.
(b) Repurchase agreement collateralized by:
U.S. Treasury Strips, par value $980,000, 6.29%, matures 11/15/26:
market value $181,300.
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
37
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THIRD AVENUE TRUST
THIRD AVENUE REAL ESTATE VALUE FUND
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 31, 1999
ASSETS:
Investments at value (Notes 1 and 4):
Unaffiliated issuers (identified cost of $7,847,339) $7,852,227
Cash (Note 1) 537,268
Receivable for fund shares sold 71,725
Dividends and interest receivable 35,129
Other assets 145
-----------
Total assets 8,496,494
-----------
LIABILITIES:
Payable for securities purchased 56,103
Payable for fund shares redeemed 75,943
Payable to investment adviser 4,080
Accounts payable and accrued expenses 48,055
-----------
Total liabilities 184,181
-----------
Net assets $8,312,313
===========
SUMMARY OF NET ASSETS:
Common stock, unlimited shares authorized, no par value,
749,696 shares outstanding $8,102,631
Accumulated undistributed net investment income 150,484
Accumulated undistributed net realized gains from
investment transactions 54,312
Net unrealized appreciation of investments and translation
of foreign currency denominated assets and liabilities 4,886
-----------
Net assets applicable to capital shares outstanding $8,312,313
===========
Net asset value, offering and redemption price per share $11.09
=======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
38
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THIRD AVENUE TRUST
THIRD AVENUE REAL ESTATE VALUE FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1999
INVESTMENT INCOME:
Interest $ 35,938
Dividends (net of foreign withholding tax of $456) 233,757
---------
Total investment income 269,695
---------
EXPENSES:
Investment advisory fees (Note 3) 47,874
Administration fees (Note 3) 56,571
Directors' fees and expenses 53,864
Registration fees 32,558
Auditing and tax consulting fees 24,980
Transfer agent fees 24,253
Accounting services 24,003
Custodian fees 9,875
Reports to shareholders 6,083
Legal fees 5,428
Miscellaneous expenses 793
Amortization of Insurance expense 165
---------
Total operating expenses 286,447
---------
Expenses waived and reimbursed (Note 3) (186,812)
---------
Net expenses 99,635
---------
Net investment income 170,060
---------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS:
Net realized gains on investments 55,843
Net realized gains on foreign currency transactions 183
Net change in unrealized depreciation on investments (14,517)
Net change in unrealized appreciation on translation of other
assets and liabilities denominated in foreign currency 11
---------
Net realized and unrealized gains on investments 41,520
---------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $211,580
=========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
39
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THIRD AVENUE TRUST
THIRD AVENUE REAL ESTATE VALUE FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THEFOR THE
YEAR PERIOD
ENDED ENDED
10/31/99 10/31/98*
--------- ---------
<S> <C> <C>
OPERATIONS:
Net investment income $ 170,060 $ 1,679
Net realized gains (losses) on investments 55,843 (1,531)
Net realized gains on foreign currency transactions 183 --
Net change in unrealized appreciation (depreciation) on investments (14,517) 19,406
Net change in unrealized appreciation (depreciation) on translation
of other assets and liabilities denominated in foreign currency 11 (14)
--------- --------
Net increase in net assets resulting from operations 211,580 19,540
--------- --------
DISTRIBUTIONS:
Dividends to shareholders from net investment income (26,438) --
--------- --------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares 8,594,336 693,412
Net asset value of shares issued in reinvestment of
dividends and distributions 26,336 --
Cost of shares redeemed (1,206,453) --
--------- --------
Net increase in net assets resulting from capital
share transactions 7,414,219 693,412
--------- --------
Net increase in net assets 7,599,361 712,952
Net assets at beginning of period 712,952 --
--------- --------
Net assets at end of period
(including undistributed net investment income of
$150,484 and $6,679, respectively) $8,312,313 $712,952
========== ========
* The Fund commenced investment operations September 17, 1998.
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
40
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THIRD AVENUE TRUST
THIRD AVENUE REAL ESTATE VALUE FUND
FINANCIAL HIGHLIGHTS
SELECTED DATA (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD) AND RATIOS ARE
AS FOLLOWS:
<TABLE>
<CAPTION>
FOR THE FOR THE
YEAR PERIOD
ENDED ENDED
10/31/99 10/31/98*
---------- ---------
<S> <C> <C>
Net Asset Value, Beginning of Period $10.28 $10.00
----- -----
Income from Investment Operations:
Net investment income .20 .02
Net gain on securities (both realized
and unrealized) .71 .26
----- -----
Total from Investment Operations .91 .28
----- -----
Less Distributions:
Dividends from net investment income (.10) --
----- -----
Net Asset Value, End of Period $11.09 $10.28
===== =====
Total Return 8.86% 2.80%1
Ratios/Supplemental Data:
Net Assets, End of period (in thousands) $8,312 $ 713
Ratio of Expenses to Average Net Assets
Before expense reimbursement 5.38% 81.89%2
After expense reimbursement 1.87% 1.90%2
Ratio of Net Income (Loss) to Average Net Assets
Before expense reimbursement (0.31%) (77.33%)2
After expense reimbursement 3.20% 2.66%2
Portfolio Turnover Rate 5% 0%1
</TABLE>
1 Not Annualized
2 Annualized. Note that annualized expenses and net income (loss) before
expense reimbursement are not necessarily indicative of expected expenses
due to the annualization of certain fixed expenses.
* The Fund commenced investment operations September 17, 1998.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
41
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PERFORMANCE INFORMATION
(UNAUDITED)
PERFORMANCE ILLUSTRATIONS
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT IN THIRD
AVENUE REAL ESTATE VALUE FUND AND THE BLOOMBERG REIT SMALL CAP INDEX AND
THE BLOOMBERG REAL ESTATE OPERATING COMPANY INDEX AND THE WILSHIRE
REAL ESTATE SECURITIES INDEX
Average Annual Total Return
[CHART]
Since Inception
1 Year (9/17/98)
8.86% 10.56%
* The period beginning September 17, 1998 (THIRD AVENUE REAL ESTATE VALUE FUND'S
commencement of operations.)
As with all mutual funds, past performance does not indicate future results.
42
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THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1999
1. SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION:
Third Avenue Trust (the "Trust") is an open-end, non-diversified management
investment company organized as a Delaware business trust pursuant to a Trust
Instrument dated October 31, 1996. The Trust currently consists of four separate
investment series: Third Avenue Value Fund, Third Avenue Small-Cap Value Fund,
Third Avenue High Yield Fund and Third Avenue Real Estate Value Fund (each a
"Fund" and, collectively, with the exception of Third Avenue High Yield Fund,
the "Funds"). The information presented in these financial statements pertains
to Third Avenue Value Fund, Third Avenue Small-Cap Value Fund and Third Avenue
Real Estate Value Fund. Third Avenue High Yield Fund is presented under a
separate cover. At the close of business on March 31, 1997, shareholders of
Third Avenue Value Fund, Inc., a Maryland corporation which was incorporated on
November 27, 1989 and began operations on October 9, 1990, became shareholders
of Third Avenue Value Fund. Third Avenue Small-Cap Value Fund commenced
investment operations on April 1, 1997. Third Avenue Real Estate Value Fund
commenced investment operations on September 17, 1998. The Funds seek to achieve
their investment objectives of long-term capital appreciation by adhering to a
strict value discipline when selecting securities. While the Funds pursue a
capital appreciation objective, each Fund has a distinct investment approach.
Third Avenue Value Fund seeks to achieve its objective by investing in a
portfolio of equity securities of well-financed companies believed to be priced
below their private market values and debt securities providing strong,
protective covenants and high, effective yields.
Third Avenue Small-Cap Value Fund seeks to achieve its objective by investing at
least 65% of its assets in a portfolio of equity securities of well-financed
companies having market capitalizations of below $1 billion at the time of
investment and believed to be priced below their private market values.
Third Avenue Real Estate Value Fund seeks to achieve its objective by investing
at least 65% of its total assets in a portfolio of equity and debt securities of
well-financed companies in the real estate industry or related industries or
that own significant real estate assets at the time of investment.
Third Avenue High Yield Fund has entered into an Agreement and Plan of
Reorganization with Pioneer High Yield Fund. Under this agreement, Third Avenue
High Yield Fund will transfer all of its assets to Pioneer High Yield Fund in
exchange for Class A shares of Pioneer High Yield Fund and Pioneer High Yield
Fund will assume the liabilities of Third Avenue High Yield Fund. Class A shares
of Pioneer High Yield Fund having a value on the reorganization date equal to
the value of Third Avenue High Yield Fund shares will be distributed to Third
Avenue High Yield Fund shareholders in exchange for their Third Avenue High
Yield Fund shares. The consummation of this transaction is subject to, among
other things, approval by Third Avenue High Yield Fund's shareholders of the
Agreement and Plan
43
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THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1999
of Reorganization. It is anticipated that a meeting of shareholders to approve
the Agreement and Plan of Reorganization will be held in February, 2000.
ACCOUNTING POLICIES:
The policies described below are followed consistently by the Funds in the
preparation of their financial statements in conformity with accounting
principles generally accepted in the United States of America.
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.
SECURITY VALUATION:
Securities traded on a principal stock exchange or the National Association of
Securities Dealers' Automated Quotation System ("NASDAQ") are valued at the last
quoted sales price or, in the absence of closing sales prices on that day,
securities are valued at the mean between the closing bid and asked price.
Temporary cash investments are valued at cost, plus accrued interest, which
approximates market. Short-term securities with original or remaining maturities
in excess of 60 days are valued at the mean of their quoted bid and asked
prices. Short-term securities with 60 days or less to maturity are amortized to
maturity based on their cost if acquired within 60 days of maturity, or if
already held by a Fund on that day, based on the value determined on that day.
The Funds may invest up to 15% of their total assets in securities which are not
readily marketable, including those which are restricted as to disposition under
applicable securities laws ("restricted securities"). Restricted securities and
other securities and assets for which market quotations are not readily
available are valued at "fair value", as determined in good faith by the Board
of Trustees of the Funds, although actual evaluations may be made by personnel
acting under procedures established by the Board of Trustees. At October 31,
1999, such securities had a total fair value of $143,525,856 or 10.71% of net
assets of Third Avenue Value Fund and $5,376,950 or 4.41% of net assets of Third
Avenue Small-Cap Value Fund. Among the factors considered by the Board of
Trustees in determining fair value are the type of security, trading in
unrestricted securities of the same issuer, the financial condition of the
issuer, the Fund's cost at the date of purchase, a percentage of the Fund's
beneficial ownership of the issuer's common stock and debt securities, the
operating results of the issuer, the discount from market value of any similar
unrestricted securities of the issuer at the time of purchase and liquidation
values of the issuer. The fair values determined in accordance with these
procedures may differ significantly from the amounts which would be realized
upon disposition of the securities. Restricted securities often have costs
associated with subsequent registration. The restricted securities currently
held by the Funds are not expected to incur any future registration costs.
SECURITY TRANSACTIONS AND INVESTMENT INCOME:
Security transactions are accounted for on a trade date basis. Dividend income
is recorded on the ex-dividend date and
44
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THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1999
interest income, including, where applicable, amortization of premium and
accretion of discount on investments, is accrued daily, except when collection
is not expected. Realized gains and losses from securities transactions are
reported on an identified cost basis.
FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS:
The books and records of the Funds are maintained in U.S. dollars. Foreign
currency amounts are translated into U.S. dollars as follows:
o INVESTMENTS: At the prevailing rates of exchange on the valuation date.
o INVESTMENT TRANSACTIONS AND INVESTMENT INCOME: At the prevailing rates of
exchange on the date of such transactions.
Although the net assets of the Funds are presented at the foreign exchange rates
and market values at the close of the period, the Funds do not isolate that
portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of the securities held at period end. Similarly, the Funds do not isolate
the effect of changes in foreign exchange rates from the fluctuations arising
from changes in the market prices of securities sold during the period.
Accordingly, realized and unrealized foreign currency gains (losses) are
included in the reported net realized and unrealized gains (losses) on
investment transactions and balances.
FOREIGN CURRENCY SWAP CONTRACTS:
Third Avenue Value Fund has entered into foreign currency swaps to exchange
Japanese yen for U.S. dollars. A swap is an agreement that obligates two parties
to exchange a series of cash flows at specified intervals based upon or
calculated by reference to changes in specified prices or rates for a specified
amount of an underlying asset. These swaps are used to hedge the Fund's exposure
to Japanese yen denominated securities and the Japanese market. The payment
flows are usually netted against each other, with the difference being paid by
one party to the other.
Fluctuations in the value of open swap contracts are recorded daily as net
unrealized gains or losses. The Fund realizes a gain or loss upon termination or
reset of the contracts. The statement of operations reflects net unrealized
gains (losses) on these contracts.
FORWARD FOREIGN CURRENCY CONTRACTS:
Third Avenue Value Fund has engaged in portfolio hedging with respect to changes
in currency exchange rates by entering into forward foreign currency contracts
to sell currencies. A forward currency contract is a commitment to purchase or
sell a foreign currency at a future date at a negotiated forward rate.
Fluctuations in the value of forward foreign currency contracts are recorded
daily as net unrealized gains or losses. The Fund realizes a gain or loss upon
settlement of contracts.
45
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THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1999
FOREIGN CURRENCY OPTION CONTRACTS:
An option contract gives the buyer the right, but not the obligation to buy
(call) or sell (put) an underlying item at a fixed exercise price on a certain
date or during a specified period. The use of foreign currency put option
strategies provide the Funds with protection against a rally in the U.S. dollar
versus the foreign currency while retaining the benefits (net of option cost) of
appreciation in foreign currency on equity holdings.
LOANS OF PORTFOLIO SECURITIES:
Third Avenue Small-Cap Value Fund and Third Avenue Real Estate Value Fund loaned
securities during the year to certain brokers, with the Funds' custodian acting
as lending agent. Upon such loans, the Funds receive collateral which is
maintained by the custodian and earns income in the form of negotiated lenders'
fees, which are included in interest income in the Statements of Operations. On
a daily basis, the Funds monitor the market value of securities loaned and
maintain collateral against the securities loaned in an amount not less than the
value of the securities loaned. The Funds may receive collateral in the form of
cash or other eligible securities. Risks may arise upon entering into securities
lending to the extent that the value of the collateral is less than the value of
the securities loaned due to changes in the value of collateral or the loaned
securities.
During the year ended October 31, 1999, the following Funds had securities
lending income included in interest income totaling:
FUND
-----
Third Avenue Small-Cap Value Fund $16,518
Third Avenue Real Estate Value Fund 490
The value of loaned securities and related collateral outstanding at October 31,
1999, was as follows:
VALUE OF VALUE OF
FUND SECURITIES LOANED COLLATERAL
----- --------------- ---------
Third Avenue Small-Cap Value Fund $3,881,217 $4,003,400
The collateral for the Third Avenue Small-Cap Value Fund consisted of cash which
was invested in repurchase agreements with Bear Stearns due November 1, 1999,
collateralized by U.S. Treasury securities.
REPURCHASE AGREEMENTS:
Securities pledged as collateral for repurchase agreements are held by the
Funds' custodian bank until maturity of the repurchase agreement. Provisions in
the agreements ensure that the market value of the collateral is at least equal
to the repurchase value in the event of default. In the event of default, the
Funds have the right to liquidate the collateral and
46
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THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1999
apply the proceeds in satisfaction of the obligation. Under certain
circumstances, in the event of default or bankruptcy by the other party to the
agreement, realization and/or retention of the collateral may be subject to
legal proceedings.
ORGANIZATIONAL COSTS:
Organizational costs of $56,000 for Third Avenue Small-Cap Value Fund are being
amortized on a straight line basis over five years from commencement of
operations.
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income paid to shareholders and distributions from
realized gains on sales of securities paid to shareholders are recorded on the
ex-dividend date. The amount of dividends and distributions from net investment
income and net realized capital gains are determined in accordance with Federal
income tax regulations which may differ from accounting principles generally
accepted in the United States of America. These "book/tax" differences are
either temporary or permanent in nature. To the extent these differences are
permanent in nature, such amounts are reclassified within the capital accounts
based on their tax-basis treatment. Temporary differences do not require
reclassification.
For the year ended October 31, 1999, permanent differences were reclassified as
shown below:
<TABLE>
<CAPTION>
INCREASE (DECREASE) TO
INCREASE (DECREASE) TO ACCUMULATED UNDISTRIBUTED
ACCUMULATED NET REALIZED GAIN (LOSS) ON
UNDISTRIBUTED NET INVESTMENTS AND FOREIGN DECREASE TO
INVESTMENT INCOME CURRENCY ADDITIONAL PAID-IN-CAPITAL
------------------ ----------------------- --------------------------
<S> <C> <C> <C>
Third Avenue Value Fund $(15,512,557) $20,155,005 $(4,642,448)
Third Avenue Small-Cap Value Fund 46,703 (46,703) --
Third Avenue Real Estate Value Fund 183 (183) --
</TABLE>
These adjustments are primarily attributable to differing book and tax
treatments of foreign currency transactions.
FEDERAL INCOME TAXES:
The Funds have complied and intend to continue to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies.
Therefore, no Federal income tax provision is required.
CASH AND CASH EQUIVALENTS:
The Funds have defined cash and cash equivalents as cash in interest bearing and
non-interest bearing accounts.
EXPENSE ALLOCATION:
Expenses attributable to a specific Fund are charged to that Fund. Expenses
attributable to the Trust are allocated using the ratio of each Fund's net
assets relative to the total net assets of the Trust, unless otherwise
specified.
47
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THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1999
TRUSTEES FEES:
The Trust does not pay any fees to its officers for their services as such, but
does pay Trustees who are not affiliated with the Investment Adviser a fee of
$1,500 per Fund for each meeting of the Board of Trustees that they attend, in
addition to reimbursing all Trustees for travel and incidental expenses incurred
by them in connection with their attendance at Board meetings. The Trust also
pays non-interested Trustees an annual stipend of $2,000 per Fund in January of
each year for the previous year's service.
2. SECURITIES TRANSACTIONS
PURCHASES AND SALES/CONVERSIONS:
The aggregate cost of purchases, and aggregate proceeds from sales and
conversions of investments, excluding short-term investments, from unaffiliated
and affiliated issuers (as defined in the Investment Company Act of 1940) for
the year ended October 31, 1999 were as follows:
PURCHASES SALES
-------- -----
THIRD AVENUE VALUE FUND:
Affiliated $28,521,260 $ 54,919,202
Unaffiliated 37,743,042 408,464,251
Third Avenue Small-Cap Value Fund:
Unaffiliated 12,795,566 25,718,319
Third Avenue Real Estate Value Fund:
Unaffiliated 7,454,175 216,893
At October 31, 1999, cost and gross unrealized appreciation and gross unrealized
depreciation, for Federal income tax purposes were as follows:
<TABLE>
<CAPTION>
NET
GROSS GROSS APPRECIATION/
COST APPRECIATION DEPRECIATION (DEPRECIATION)
-------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Third Avenue Value Fund $906,744,253 $504,115,193 $(72,353,562) $431,761,631
Third Avenue Small-Cap
Value Fund 131,257,883 16,920,730 (28,797,302) (11,876,572)
Third Avenue Real Estate
Value Fund 7,847,339 293,342 (288,454) 4,888
</TABLE>
48
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THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1999
3. INVESTMENT ADVISORY SERVICES AND SERVICE FEE AGREEMENT
Each Fund has an Investment Advisory Agreement with EQSF Advisers, Inc. (the
"Adviser") for investment advice and certain management functions. The terms of
each Investment Advisory Agreement provide for a monthly fee of 1/12 of 0.90%
(an annual fee of 0.90%) of the total average daily net assets of the applicable
Fund, payable each month. Additionally, under the terms of the Investment
Advisory Agreements, the Adviser pays certain expenses on behalf of the Funds,
which are reimbursable by the Funds, including salaries of non-officer employees
and other miscellaneous expenses. Amounts reimbursed with respect to non-officer
salaries are included under the caption Administration fees. At October 31,
1999, Third Avenue Value Fund, Third Avenue Small-Cap Value Fund and Third
Avenue Real Estate Value Fund had payables to affiliates of $143,485, $19,282
and $3,755, respectively, for reimbursement of expenses paid by such affiliates.
Under current arrangements for the Third Avenue Value Fund and Third Avenue
Small-Cap Value Fund, whenever, in any fiscal year, the Fund's normal operating
expenses, including the investment advisory fee, but excluding brokerage
commissions and interest and taxes, exceeds 1.90% of the first $100 million of
the Funds average daily net assets, and 1.50% of average daily net assets in
excess of $100 million, the Adviser is obligated to reimburse the Fund in an
amount equal to that excess. Effective October 15, 1999, whenever, in any fiscal
year, the Third Avenue Real Estate Value Fund's normal operating expenses,
including the investment advisory fee, but excluding brokerage commissions and
taxes, exceeds 1.50% of the Fund's average net assets, the Adviser is obligated
to reimburse the Fund in an amount equal to that excess. Prior to this date, the
Adviser was obligated to reimburse Third Avenue Real Estate Value Fund per the
agreement stated above for the Third Avenue Value Fund and Third Avenue
Small-Cap Value Fund. Such waived and reimbursed expenses may be paid to the
Adviser during the following three year period to the extent that the payment of
such expenses would not cause the Funds to exceed the preceding limitations. No
expense reimbursement was required for Third Avenue Value Fund or Third Avenue
Small-Cap Value Fund for the year ended October 31, 1999. The adviser waived
fees of $47,874, and reimbursed $138,938 for Third Avenue Real Estate Value
Fund, for the year ended October 31, 1999.
The Trust has entered into shareholder servicing agreements with certain service
agents for which the service agents receive a fee of up to 0.10% of the average
daily net assets invested into the Trust by the agent's customers in an omnibus
account. In exchange for these fees, the service agents render to such customers
various administrative services which the Trust would otherwise be obligated to
provide at its own expense.
4. RELATED PARTY TRANSACTIONS
BROKERAGE COMMISSIONS:
Martin J. Whitman, the Chairman and a director of the Funds, is the Chairman and
Chief Executive Officer of M.J. Whitman Holding Corp., which is the parent of
both M.J. Whitman, Inc., a registered broker-dealer and M.J. Whitman Senior Debt
Corp., a dealer in the trading of bank debt and other private claims. For the
year ended October
49
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THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1999
31, 1999, the Funds incurred total brokerage commissions, which includes
commissions earned by M.J. Whitman, Inc. as follows:
<TABLE>
<CAPTION>
FUND TOTAL COMMISSIONS M.J. WHITMAN, INC.
- ----- ---------------- ----------------
<S> <C> <C>
Third Avenue Value Fund $1,071,112 $672,971
Third Avenue Small-Cap Value Fund 78,630 61,498
Third Avenue Real Estate Value Fund 28,707 25,568
</TABLE>
INVESTMENTS IN AFFILIATES:
A summary of the Funds' transactions in securities of affiliated issuers for the
year ended October 31, 1999 is set forth below:
THIRD AVENUE VALUE FUND
<TABLE>
<CAPTION>
DIVIDEND/INTEREST
SHARES/PRINCIPAL SHARES/PRINCIPAL INCOME
HELD AT OCT. 31, SHARES/PRINCIPAL SHARES HELD AT OCT. 31, VALUE AT NOV. 1, 1998-
NAME OF ISSUER: 1998 PURCHASED SOLD 1999 OCT. 31, 1999 OCT. 31, 1999
- ------------- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ACMAT Corp. Class A 200,678 -- -- 200,678 $ 1,856,272 --
ADE Corp. 728,900 -- 728,900 -- + --
American Physicians
Service Group, Inc. 1,109,900 -- 1,109,9001 -- + --
Avatar Holdings, Inc. 474,300 -- 474,300 -- + --
Carver Bancorp, Inc. 218,500 -- -- 218,500 1,556,813 --
CGA Group, Ltd. 838,710 2,502,993 -- 3,341,703 0 --
CGA Group, Ltd., Series A 238,857 362,6972 -- 601,554 15,038,851 $1,655,350
CGA Group, Ltd., Series B 171,429 28,571 200,0001 -- + 2,089,624
CGA Group, Ltd., Series C -- 6,045,667 -- 6,045,667 7,039,176 --
CGA Special Account Trust $6,428,575 $1,071,425 -- $7,500,000 7,500,000 356,199
C.P. Clare Corp. 1,004,500 -- -- 1,004,500 5,336,406 --
Danielson Holding Corp. 803,669 -- -- 803,669 4,520,638 --
Electro Scientific
Industries, Inc. 1,600,300 -- -- 1,600,300 86,416,200 --
Electroglas, Inc. 1,846,200 36,300 -- 1,882,500 51,945,234 --
First American Financial Corp. 3,000,000 145,000 -- 3,145,000 + --
FSI International, Inc. 2,820,900 -- 500,000 2,320,900 18,567,200 --
Interphase Corp. 300,000 -- 300,000 -- + --
Protocol Systems, Inc. 912,900 1,000 125,000 788,900 5,620,913 --
Repap Enterprises Inc. -- 126,605,679 -- 126,605,679 7,089,918 --
Silicon Valley Group, Inc. 4,234,800 -- 500,300 3,734,500 46,681,250 --
SpeedFam International, Inc. 1,605,000 -- 1,605,000 -- + --
Stewart Information
Services Corp. 975,700 975,7003 -- 1,951,400 29,027,075 302,467
St. George Holdings, Ltd.
Class A 912,442 152,074 -- 1,064,516 106,451 --
St. George Holdings, Ltd.
Class B 7,549 1,495 -- 9,044 905 --
Tecumseh Products Co. Class A 125,400 -- -- 125,400 6,011,362 150,480
Tecumseh Products Co. Class B 417,300 -- -- 417,300 18,361,200 500,760
Tejon Ranch Co. 3,045,508 -- -- 3,045,508 81,848,027 152,275
</TABLE>
50
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THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1999
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Veeco Instruments, Inc. 663,200 -- -- 663,200 + --
Vertex Communications Corp. 306,900 -- -- 306,900 4,776,131 --
----------- ----------
Total Affiliates $399,300,022 $5,207,155
============ ==========
</TABLE>
1 Sold due to merger
2 66,214 share increase due to pay-in-kind dividends
3 Increase due to a 2:1 stock split on 5/24/99
+ As of October 31, 1999, no longer an affiliate.
THIRD AVENUE SMALL-CAP VALUE FUND
<TABLE>
<CAPTION>
DIVIDEND/INTEREST
SHARES/PRINCIPAL SHARES/PRINCIPAL INCOME
HELD AT OCT. 31, SHARES/PRINCIPAL SHARES HELD AT OCT. 31, VALUE AT NOV. 1, 1998-
NAME OF ISSUER: 1998 PURCHASED SOLD 1999 OCT. 31, 1999 OCT. 31, 1999
- ------------- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Centigram Communications Corp. 326,900 -- -- 326,900 $ 3,105,550 --
C.P. Clare Corp. 520,000 -- -- 520,000 2,762,500 --
SpecTran Corp. 490,600 -- -- 490,600 4,354,075 --
----------- -----------
Total Affiliates $10,222,125 $0
=========== ===========
</TABLE>
5. CAPITAL SHARE TRANSACTIONS
Each Fund is authorized to issue an unlimited number of shares of beneficial
interest with no par value. Transactions in capital stock were as follows:
<TABLE>
<CAPTION>
THIRD AVENUE THIRD AVENUE
VALUE FUND SMALL-CAP VALUE FUND
--------------------------------- ----------------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
OCTOBER 31, 1999 OCTOBER 31, 1998 OCTOBER 31, 1999 OCTOBER 31, 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Increase (decrease) in Fund shares:
Shares outstanding at beginning
of period 51,081,171 51,537,358 13,096,406 8,670,943
Shares sold 7,411,681 19,502,035 4,834,365 11,057,081
Shares reinvested from dividends
and distributions 578,496 877,124 96,740 46,997
Shares redeemed (20,580,542) (20,835,346) (7,266,046) (6,678,615)
----------- ----------- ----------- -----------
Net increase (decrease) in Fund shares (12,590,365) (456,187) (2,334,941) 4,425,463
----------- ----------- ----------- -----------
Shares outstanding at end of period 38,490,806 51,081,171 10,761,465 13,096,406
=========== =========== =========== ===========
</TABLE>
51
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THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1999
THIRD AVENUE
REAL ESTATE VALUE FUND
---------------------------------
FOR THE FOR THE
YEAR ENDED PERIOD ENDED
OCTOBER 31, 1999 OCTOBER 31, 1998
--------------- ---------------
Increase in FUnd shares:
Shares outstanding at beginning
of period 69,355 --
Shares sold 791,345 69,355
Shares reinvested from dividends
and distributions 2,473 --
Shares redeemed (113,477) --
-------- -------
Net increase in Fund shares 680,341 69,355
-------- -------
Shares outstanding at end of period 749,696 69,355
======== =======
6. COMMITMENTS
Third Avenue Value Fund has committed a $1,900,000 capital investment to
Insurance Partners II Equity Fund, LP of which $760,000 has been funded as of
October 31, 1999. Securities valued at $1,191,438 have been segregated to meet
the requirements of this commitment. This commitment may be payable upon demand
of Insurance Partners II Equity Fund, LP.
7. RISKS RELATING TO CERTAIN INVESTMENTS
FOREIGN SECURITIES:
Investments in the securities of foreign issuers may involve investment risks
different from those of U.S. issuers including possible political or economic
instability of the country of the issuer, the difficulty of predicting
international trade patterns, the possibility of currency exchange controls, the
possible imposition of foreign withholding tax on the dividend income and
interest income payable on such instruments, the possible establishment of
foreign controls, the possible seizure or nationalization of foreign deposits or
assets, or the adoption of other foreign government restrictions that might
adversely affect the foreign securities held by the Funds. Foreign securities
may also be subject to greater fluctuations in price than securities of domestic
corporations or the U.S. Government.
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THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1999
FOREIGN CURRENCY CONTRACTS:
The Funds may enter into foreign currency swap contracts, forward foreign
currency contracts and foreign currency option contracts. Such contracts are
over the counter contracts negotiated between two parties. There are both market
risks and credit risks associated with such contracts. Market risks are
generally limited to the movement in value of the foreign currency relative to
the U.S. dollar. Credit risks typically involve the risk that the counterparty
to the transaction will be unable to meet the terms of the contract. Foreign
currency swap contracts and forward foreign currency contracts may have risk
which exceeds the amounts reflected on the statements of assets and liabilities.
HIGH YIELD DEBT:
Third Avenue Value Fund currently invests in high yield lower grade debt. The
market values of these higher yielding debt securities tend to be more sensitive
to economic conditions and individual corporate developments than those of
higher rated securities. In addition, the secondary market for these bonds is
generally less liquid.
LOANS AND OTHER DIRECT DEBT INSTRUMENTS:
Third Avenue Value Fund invests in loans and other direct debt instruments
issued by a corporate borrower to another party. These loans represent amounts
owed to lenders or lending syndicates (loans and loan participations) or to
other parties. Direct debt instruments may involve a risk of loss in case of
default or insolvency of the borrower and may offer less legal protection to the
Fund in the event of fraud or misrepresentation. In addition, loan
participations involve a risk of insolvency of the lending bank or other
financial intermediary. The markets in loans are not regulated by federal
securities laws or the SEC.
TRADE CLAIMS:
Third Avenue Value Fund invests in trade claims. Trade claims are interests in
amounts owed to suppliers of goods or services and are purchased from creditors
of companies in financial difficulty. An investment in trade claims is
speculative and carries a high degree of risk. Trade claims are illiquid
securities which generally do not pay interest and there can be no guarantee
that the debtor will ever be able to satisfy the obligation on the trade claim.
The markets in trade claims are not regulated by federal securities laws or the
SEC. Because trade claims are unsecured, holders of trade claims may have a
lower priority in terms of payment than certain other creditors in a bankruptcy
proceeding.
8. CAPITAL LOSS CARRYFORWARDS
During the year ended October 31, 1999, Third Avenue Value Fund, Third Avenue
Small-Cap Value Fund and Third Avenue Real Estate Value Fund utilized net
capital loss carryforwards of $15,833,337, $523,582 and $1,531, respectively. At
October 31, 1999, no further capital loss carryforwards were available for Third
Avenue Value Fund and Third Avenue Real Estate Value Fund. Third Avenue
Small-Cap Value Fund had $69,341 of capital loss
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THIRD AVENUE TRUST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
OCTOBER 31, 1999
carryforward remaining which may be used to offset future net capital gains, to
the extent provided by regulations, through October 31, 2006.
To the extent that capital loss carryforwards are used to offset any future
capital gains realized during the carryover period as provided by U.S. Federal
income tax regulations, no tax liability will be incurred by the Fund for gains
realized and not distributed. To the extent that capital gains are offset, such
gains will not be distributed to shareholders.
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REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES AND SHAREHOLDERS OF
THIRD AVENUE TRUST
In our opinion, the accompanying statements of assets and liabilities, including
the portfolios of investments, and the related statements of operations, of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Third Avenue Value Fund, Third
Avenue Small-Cap Value Fund and Third Avenue Real Estate Value Fund (together
the "Funds", three of the four series comprising Third Avenue Trust) at October
31, 1999 and the results of each of their operations, the changes in each of
their net assets and the financial highlights for each of the periods presented,
in conformity with accounting principles generally accepted in the United States
of America. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Funds'
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at October 31, 1999 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP 1177
Avenue of the Americas
New York, New York 10036
December 17, 1999
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THIRD AVENUE TRUST
FEDERAL TAX STATUS OF DIVIDENDS
(UNAUDITED)
The following information represents the tax status of dividends and
distributions paid by the Funds during the fiscal year ended October 31, 1999.
This information is presented to meet regulatory requirements and no current
action on your part is required.
THIRD AVENUE VALUE FUND
Of the $0.402 per share paid to you in cash or reinvested into your account for
the fiscal year ended October 31, 1999, the entire amount was derived from net
investment income. 35.13% of the ordinary income distributed qualifies for the
Corporate Dividends Received Deduction.
THIRD AVENUE SMALL-CAP VALUE FUND
Of the $0.088 per share paid to you in cash or reinvested into your account for
the fiscal year ended October 31, 1999, the entire amount was derived from net
investment income. 100% of the ordinary income distributed qualifies for the
Corporate Dividends Received Deduction.
THIRD AVENUE REAL ESTATE VALUE FUND
Of the $0.097 per share paid to you in cash or reinvested into your account for
the fiscal year ended October 31, 1999, the entire amount was derived from net
investment income. 95.46% of the ordinary income distributed qualifies for the
Corporate Dividends Received Deduction.
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BOARD OF TRUSTEES
Phyllis W. Beck
Lucinda Franks
Gerald Hellerman
Marvin Moser
Donald Rappaport
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
PFPC Inc.
211 South Gulph Road
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
[LOGO]
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
