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THIRD AVENUE VALUE FUND
THIRD AVENUE SMALL-CAP VALUE FUND
THIRD AVENUE HIGH YIELD FUND
THIRD AVENUE REAL ESTATE VALUE FUND
THIRD QUARTER REPORT
(Unaudited)
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July 31, 1999
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THIRD AVENUE VALUE FUND
Dear Fellow Shareholders:
At July 31, 1999 the unaudited net asset value attributable to the 40,363,982
common shares outstanding of the Third Avenue Value Fund ("TAVF", "Third Avenue"
or the "Fund") was $33.78 per share. This compares with an unaudited net asset
value of $31.54 per share at April 30, 1999, and an unaudited net asset value,
adjusted for a subsequent distribution, of $30.50 per share at July 31, 1998. At
August 25, 1999, the unaudited net asset value was $33.28 per share.
QUARTERLY ACTIVITY
The dominant activity during the last quarter was the sale of securities to meet
redemptions. The common capitalization of TAVF, as measured by shares
outstanding, shrunk by 5% during the three-month interim. With the exceptions of
the sales of Glenayre Common and Hologic Common, all the other sales were
strictly for portfolio purposes; the Fund raised cash. In the cases of Glenayre
Common and Hologic Common, permanent impairments of capital might be taking
place within those businesses, in my opinion. Bankers Trust Common was sold in a
cash merger transaction. TAVF also wrote off completely its $1.3 million
investment in HIPI Holdings, Inc. Common Stock ("HIPI Common").
PRINCIPAL AMOUNT
OR
NUMBER OF SHARES NEW POSITIONS ACQUIRED
$8,000,000 Hechinger Co. 9.45%, due 11/15/12
Senior Notes ("Hechinger Notes")
INCREASES IN EXISTING POSITIONS
$13,471,000 PhyMatrix Corp. 6.75% Debentures
due 6/15/03 ("PhyMatrix Subordinates")
$190,000 Insurance Partners II Equity Fund, LP
("lnsurance Partners Common")
10,000 shares Analogic Corp. Common Stock ("Analogic Common")
REDUCTIONS IN EXISTING POSITIONS
34,900 shares Alamo Group, Inc. Common Stock ("Alamo Common")
81,100 shares Cummins Engine Co., Inc. Common Stock
("Cummins Common")
221,000 shares Hologic, Inc. Common Stock ("Hologic Common")
271,400 shares Leucadia National Corp. Common Stock
("Leucadia Common")
450,000 shares Nabors Industries, Inc. Common Stock ("Nabors Common")
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PRINCIPAL AMOUNT
OR
NUMBER OF SHARES REDUCTIONS IN EXISTING POSITIONS (CONTINUED)
74,000 shares The Nissan Fire & Marine Insurance Co., Ltd.
Common Stock ("Nissan Common")
6,000 shares Risk Capital Holdings, Inc. Common Stock
("Risk Capital Common")
179,900 shares SpeedFam-IPEC, Inc. Common Stock
("SpeedFam Common")
200,000 shares 3Com Corp. Common Stock ("3Com Common")
POSITIONS ELIMINATED
356,800 shares ADE Corp. Common Stock ("ADE Common")
90,000 shares American International Group, Inc. Common Stock
("AIG Common")
331,200 shares Avatar Holdings, Inc. Common Stock ("Avatar Common")
123,237 shares BankAtlantic Bancorp, Inc. Class A Common Stock
("BankAtlantic Common")
100,000 shares Bankers Trust New York Corp. Common Stock
("Bankers Trust Common")
565,700 shares Glenayre Technologies, Inc. Common Stock
("Glenayre Common")
100,000 shares Novell, Inc. Common Stock ("Novell Common")
3,175 shares Palm Harbor Homes, Inc. Common Stock
("Palm Harbor Common")
434,536 shares ReliaStar Financial Corp. Common Stock
("ReliaStar Common")
33,529 shares SunGard Data Systems Inc. Common Stock
("SunGard Common")
The Fund's all-in cost basis for the Hechinger Senior Notes was 13% of the
principal claim. Hechinger is in Chapter 11, having demonstrated an inability to
compete with Home Depot and Lowe's in the superstore retailing of home
improvement and building supply products. If, as seems likely, Hechinger is to
go out of business, our returns on this investment should be handsome. Proceeds
from the liquidation of inventories in Going Out of Business, or GOB, sales
ought to generate enough funds to satisfy the claims of secured creditors;
Hechinger Senior Notes are unsecured. If so, the proceeds from the values of
affirmed leases should provide good returns to all unsecured creditors, to wit
the Senior Notes, Trade Claims, landlords whose leases have been rejected, as
well as certain Kmart claims. Home Depot and Lowe's are two concerns likely to
find many of the current Hechinger real estate locations very attractive places
in which to open stores. These entities seem likely to want to take over many
Hechinger leases. A principal risk in the
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Hechinger investment appears to be the threat that asset values may be
dissipated dramatically if Hechinger's decides to continue to attempt to become
a going-concern over a protracted period and fails in such endeavors.
At TAVF's cost, the investment in PhyMatrix Subordinates affords a yield to
maturity of around 27% and a current yield in excess of 13%, provided the
Subordinates remain a performing loan. The best indications are that the
Subordinates probably will remain a performing loan. However, if there is to be
a money default and PhyMatrix has to reorganize either out-of-court, or in
Chapter 11, the Fund wants to be highly influential in the reorganization
process. That is exactly what will happen since Third Avenue now owns almost 50%
of the outstanding issue of Subordinates. If in any reorganization management
wants to preserve any value for PhyMatrix Common Stock (hereafter called "ICSL
Common"), the debtor will have to reach an agreement with the Fund, or else
leave the issue as a performing loan. During the quarter we visited the company
in Providence. PhyMatrix has changed its name to Innovative Clinical Solutions
Ltd. ("ICSL"). ICSL seems to be a rather interesting venture capital play,
especially in the field of off-site clinical research for pharmaceutical
companies. We proposed a voluntary exchange offer to ICSL management under which
the PhyMatrix Subordinates would be exchangeable; 1/2 for ICSL Common Stock and
1/2 for a new issue of ICSL Senior Subordinates with a stretched-out maturity.
Management does not appear to be interested in the Fund's proposal, apparently
because they think that ICSL Common, selling around 13/8-11/2, is dirt-cheap.
The price of Analogic Common declined markedly when Analogic issued a
disappointing quarterly report. At that time, the Fund expanded modestly its
position in Analogic Common before the price of Analogic Common rallied.
Analogic is a leader in providing the basic technology for the non-invasive
examination of sub-surface materials. End users of Analogic products are medical
equipment companies, and probably to an increasing extent, providers of security
systems to airports. I don't think we have a more exciting growth stock in the
TAVF portfolio than Analogic Common.
COMMENTS ABOUT TWO CORE HOLDINGS
Progress during the quarter at several of the Fund's core holdings seems to have
been excellent, albeit this progress was not evidenced by increases in reported
earnings. Two companies to be singled out are Tejon Ranch Company ("Tejon") and
Toyoda Automatic Loom Works ("Toyoda"). At the end of the quarter, the market
value for the Fund's holdings of Tejon Common was $89.7 million, or $2.22 per
share of TAVF Common. The market value of the Toyoda Common held was $40.8
million, or $1.01 per share of TAVF Common.
Tejon, whose principal asset is the ownership of over 270,000 acres, is the
largest contiguous land assembly in California. Tejon is located 60 miles north
of Los Angeles and 30 miles south of Bakersfield. Management seems to be doing a
superb job of developing the property responsibly and profitably. On June 30, a
mammoth 415-berth, 51-acre, truck stop named Petro Travel Plaza, opened along
Highway I-5 on Tejon property. Tejon is a joint venturer with Petro Stopping
Centers in the project. To date, traffic at Petro Travel Plaza has been close
to, or in excess of, earlier best case projections. If continued, this ought to
have quite positive ramifications for Tejon over and above profits from the
Petro Travel Plaza because of the enhanced development potential for the
approximately 300 acres of other property fronting on Highway I-5, which will
become the Tejon Industrial Complex. Tejon owns 32 miles of frontage on I-5-- 16
miles on each side of this heavily traveled route. Management also made
attractive deals for interior acreage with Qwest and Enron. Finally, Tejon and
two leading Los Angeles developers signed a letter of intent during the quarter
looking toward a joint venture, which would create a 4,000-acre planned
residential community.
The Fund's investment in Toyoda Common was basically a means of buying into
Toyota Motor Corp. Common Stock ("Toyota Common") at a discount. Toyoda is the
largest single shareholder of Toyota, having an approximate 5%
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equity interest. During the quarter the discount widened appreciably as Toyota
Common appreciated. At July 31, Toyoda Common was selling at $18.53 per share;
its holdings of Toyota Common alone had a market value of $21.41 per Toyoda
share. In addition, other marketable common stocks held by Toyoda, mostly other
Toyota suppliers, had a market value of $7.55 per Toyoda share. Furthermore,
Toyoda has operating businesses, which enjoy annual operating income, after
interest costs and before income taxes, of perhaps 60(cent) to 90(cent) per
Toyoda share. These operating businesses supply various parts to Toyota, and
also manufacture automobiles and lift trucks under the Toyota name. Other
businesses include a small textile operation and a joint venture with Sony
Corporation; the joint venture is involved with high tech development work in
Liquid Crystal Displays ("LCD's"). The operating business could be relatively
exciting. Toyota's hottest model in Japan, and probably also in Asia, is the
"Vitz." The "Vitz" is manufactured by Toyoda.
THE ROLE OF ACCOUNTING IN SECURITY ANALYSIS
Corporate reporting of "the numbers" has become so important, and so publicized,
it might be helpful to TAVF stockholders if I commented briefly about how the
Fund's management uses, and thinks, about financial statements prepared in
accordance with Generally Accepted Accounting Principles, or GAAP. TAVF is quite
different from most others in how the Fund makes use of financial information.
First, financial statements are always of utmost importance in the TAVF scheme
of things. This, perhaps, may be the most significant reason why Third Avenue
has never been involved with pure play internet issues. Here, corporate numbers
don't seem to count at all. The only important thing seems to be to gauge
short-term investor psychology - something to which TAVF management pays scant
attention.
GAAP figures can serve two different roles for outside passive minority
investors. First, an accounting number - usually earnings per share - is a tool
to be used to help predict the price at which a common stock will sell in
markets just ahead. Alternatively, all accounting numbers - the whole
bookkeeping cycle - are tools to be used to give an investor objective
benchmarks, clues to aid him or her in understanding a business and its
dynamics.
The vast majority of analysts seem to view GAAP only in its first role, as a
tool to be used to help predict the price at which a common stock will sell in
the period just ahead. The regulators, whether governmental as embodied in the
Securities and Exchange Commission, or private as embodied in the Financial
Accounting Standards Board, seem to share the same view wholeheartedly.
Estimating the market impact of accounting numbers is what counts for them.
Thus, there is a primacy of the income account. There has to be as accurate a
statement as possible of quarterly reports of income from operations; Earnings
Before Interest, Taxes, Depreciation and Amortization ("EBITDA"); and Earnings
Per Share ("EPS"). The focus is on an income account, or flow, number with full
attention paid to what the numbers ARE, as reported, rather than what the
numbers MEAN.
Third Avenue belongs to the second school in its use of GAAP. TAVF believes that
financial accounts are essential tools giving analysts objective benchmarks,
clues that will aid in understanding a business and its dynamics. In equity
analysis, accounting cannot, and should not, be expected to tell real world
Truths. Rather, the limiting assumptions of GAAP -- for example, depreciation is
based on original cost rather than current value -- means that what the numbers
are, are not what economic TRUTH IS. Additionally, if one wants to understand a
business and its dynamics, one has to focus on a considerably greater number of
factors than merely flows - whether income from operations, EBITDA or EPS.
Equally important, and usually more important than flows, in a TAVF analysis is
the quality of resources existing in a business and the quantity of resources
(relative to the price being paid for a common stock) existing in a business.
Quality of resources and quantity of resources are essentially balance sheet,
rather than flow, considerations. Further,
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in a TAVF analysis, there is no primacy of anything such as earnings, but rather
a realization that any number within the whole "ball of wax" can be important.
Every accounting number is a function of, derived from, and modified by other
accounting numbers. The analytical techniques used by Third Avenue, while
different from those that seem to be used by most money managers, seem to be
quite similar to those used by most investors in control, or interested in
obtaining control, of companies.
Against this background, it seems productive to examine a couple of
controversies existing in the accounting profession today: 1) how to expense the
issuance of common stocks in acquisitions or the issuance of common stock
equivalents such as options to executive and employees; and 2) how to account
for corporate acquisitions - purchase accounting vs. pooling of interest
accounting.
In a TAVF analysis, a company is a stand-alone for accounting purposes and its
books and records affect what exists in the company and what is happening to the
company. As far as the Fund is concerned, corporate accounting, per se, should
not, in any way, be related to common stock prices of particular corporations.
There is a great hue and cry in the financial world stating that companies ought
to charge as an expense against the income account the market value of
securities such as executive stock options issued as management compensation.
This charge against the income account should equal charges for cash payments to
management, such as for salaries and bonuses.
This point of view seems to be arrant nonsense for the purpose of any
fundamental analysis, especially because the company ought to be viewed as a
stand-alone separate and apart from its shareholders. Obviously, the effects on
a company are quite different when the company has to make a cash payment (or
distribute other assets) compared with when a company issues new common stock or
common stock equivalents. The payment of cash by a company diminishes the
company's assets quantitatively and perhaps qualitatively as well. In contrast,
the issuance of new common stock, where a company pays no dividends, does not
affect the company directly but rather results in a dilution of ownership.
Dilution of ownership is a stockholder problem, not a company problem. Ownership
dilution can only have a cost to the company if it results in the issuer having
less attractive access to capital markets than would otherwise be the case.
Potentially less attractive access to capital markets is a difficult thing to
measure for a company. In contrast - the cost of cash outlays are easy to
measure for a company. Measurement of the true cost of stock options is not
something that ought to be part of GAAP, in part because measurement is so
difficult. The true cost to a company of stock options ought to be estimated by
security analysts, not determined by accountants.
In connection with the issuance of stock options, their cost probably ought not
to be measured by the imputed market value of the stock option, whether the one
who measures such cost is an analyst or an accountant. The market value of the
stock option to the recipient may well reflect the value of that option to the
recipient. The value of a benefit to an optionee, however, has no necessary
relationship to the cost to the company to bestow that benefit. It's as if an
employee receives an item of inventory from the company which cost the company
$10 and has a retail selling price of $50; and, therefore, the company's income
account is charged $50, the value of the inventory item to the recipient rather
than the company's $10 cost.
In purchase accounting, the acquiring company is deemed, for valuation purposes,
to have paid a cash consideration for the acquired entity even though the
consideration paid can consist of cash, debt securities and equity securities.
The premium as so measured paid over an adjusted book value of the net assets
acquired is deemed to be purchase goodwill. Purchase goodwill is amortized in
not over 40 years (soon to be reduced to 20 years) by periodic charges to the
acquiring company's income account. Pooling can take place when certain
requirements are met, among which are that an acquisition include only exchanges
of common stocks for common stocks between, or among, merging com-
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panies. In a pooling, old accounts are consolidated as they appear on each
entity's books and no purchase goodwill is created. Pooling accounting is soon
to be banned.
From a TAVF point of view, both purchase accounting and pooling accounting have
merit. If the analyst wants clues only as to how to appraise an entity as a
strict going concern engaged in day-to-day operations, pooling tends to fill the
bill. On the other hand, if managements are to be appraised as investors as well
as operators, purchase accounting gives additional clues, to wit, the amount of
premium paid over an adjusted book value. Either approach to an analysis can be
legitimate. Neither purchase nor pooling ought to be expected to tell economic
Truth. That is for the analyst to determine for himself or herself using the
clues provided by purchase or pooling, as well as financial accounting in
general. It seems as if the accounting profession has now got it right in
solving the purchase vs. pooling controversy. Commencing next year, only
purchase accounting will be used, but companies will report two results - one
with a periodic charge for goodwill deducted as an expense and one without any
expense deduction for goodwill. The authorities, in connection with this issue,
and other pronouncements as well, seem to be waking up to the GAAP fact of life
that there is no "holy grail," i.e., that there never can exist just one number,
presumably EPS, that reflects a universal TRUTH.
It is not that quarterly earnings or EPS are ever unimportant for TAVF. They are
important when they provide clues that a permanent impairment of capital may be
taking place. Permanent impairments are much more likely to occur for companies
which are poorly financed. These are just the sorts of companies in whose
equities Third Avenue does not invest.
In terms of what the numbers MEAN rather than what the numbers are, it may be
constructive to examine what the numbers may mean for Tejon and Toyoda.
Basically what Tejon management seems to be creating in its real estate
activities is unrealized appreciation. Unrealized appreciation for assets, other
than marketable securities, is never reflected in financial statements.
Therefore, the reported earnings figures for Tejon, which is well financed, do
not mean a lot. One has to look well beyond them to understand the Tejon
business and its dynamics.
A number of brokerage house analyses of Toyoda focus on the fact that Toyoda
Common sells at over 50 times reported earnings; none seem to focus on the
Toyoda net asset value as measured by market prices for its huge securities
portfolio. In these brokerage house analyses, what the earnings number IS, and
is projected TO BE in the period ahead seem to be key. Not one of these analyses
picked up the fact that the Toyoda income account and EPS reflects only
dividends received from the common stocks of portfolio companies, including
Toyota Common. If Toyoda used "look through" accounting where, besides
dividends, the Toyoda income account also included Toyoda's equity in the
undistributed earnings attributable to the common stocks of portfolio companies,
then the PE ratio would be materially more modest than 50 times earnings. Also,
Toyoda reflects in its income account its share of losses being incurred in the
Sony LCD venture. Assuming that the Sony LCD venture is promising, a reasonable
analyst might conclude that it makes better business sense to capitalize, rather
than expense, those losses for purposes of a valuation analysis.
I shall write you again when the 1999 Annual Report is published.
Sincerely yours,
/s/Martin J. Whitman
- --------------------
Martin J. Whitman
Chairman of the Board
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS
AT JULY 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL % OF
AMOUNT ($) ISSUES VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BANK AND OTHER DEBT - 1.19%
Oil Services 1,267,336 Cimarron Petroleum Corp. (c) (d) $ 1,286,561 0.10%
-----------
Retail 295,370 Lechmere, Inc. Trade Claim (a) (c) 35,444
13,266,207 Montgomery Ward Series I 8.37%, 7/15/02 (a) (c) * 3,349,717
8,646,766 Montgomery Ward Series C 9.24%, 3/15/03 (a) (c) * 2,183,308
10,059,333 Montgomery Ward Series F 9.81%, 3/15/03 (a) (c) * 2,539,982
26,606,561 Montgomery Ward Trade Claim (a) (c) 6,784,673
-----------
14,893,124 1.09%
-----------
TOTAL BANK AND OTHER DEBT
(Cost $22,441,040) 16,179,685
-----------
- ----------------------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS - 1.56%
Medical Management 44,140,000 PhyMatrix Corp. 6.75%, due 6/15/03 21,297,550 1.56%
-----------
Services
TOTAL CONVERTIBLE BONDS
(Cost $22,827,935) 21,297,550
-----------
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CORPORATE BONDS - 0.64%
Bermuda Based
Financial 7,500,000 CGA Special Account Trust (b) (c) 7,500,000 0.55%
-----------
Institutions
Industrial 8,000,000 Hechinger Co. 9.45%, due 11/15/12 * 1,200,000 0.09%
-----------
TOTAL CORPORATE BONDS
(Cost $8,522,100) 8,700,000
-----------
SHARES
- ----------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS - 91.09%
Annuities & Mutual
Fund 163,300 John Nuveen & Co., Inc. Class A 6,695,300
Management & Sales 518,600 Liberty Financial Companies, Inc. 14,261,500
-----------
20,956,800 1.54%
-----------
Apparel Manufacturers 150,000 Kleinerts, Inc. (a) (c) 1,800,000 0.13%
-----------
Bermuda Based 3,341,703 CGA Group, Ltd. (a) (b) (c) 2,925,995
Financial
Institutions 91,999 Cobalt Holdings, LLC (c) 920
118,449 ESG Re, Ltd. (a) 1,821,153
</TABLE>
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
% OF
SHARES ISSUES VALUE NET ASSETS
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<S> <C> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONTINUED)
Bermuda Based 110,917 LaSalle Re Holdings, Ltd. $ 1,809,334
Financial Institutions 1,064,516 St. George Holdings, Ltd. Class A (a) (b) (c) 106,451
(continued) 9,044 St. George Holdings, Ltd. Class B (a) (b) (c) 905
-----------
6,664,758 0.49%
-----------
Building Products 168,900 Cummins Engine Co., Inc. 10,925,719
& Related 125,400 Tecumseh Products Co. Class A (b) 8,103,975
417,300 Tecumseh Products Co. Class B (b) 24,620,700
-----------
43,650,394 3.20%
-----------
Business Development 72,445 Capital Southwest Corp. 5,650,710 0.41%
-----------
Companies
Computerized Trading 223,600 Investment Technology Group, Inc. 7,923,825 0.58%
-----------
Computers, Networks 100,000 3Com Corp. (a) 2,412,500 0.18%
-----------
& Software
Depository Institutions 53,000 Astoria Financial Corp. 2,017,312
218,500 Carver Bancorp, Inc. (b) 2,021,125
39,500 CNY Financial Corp. 543,125
61,543 Commercial Federal Corp. 1,430,875
197,307 Golden State Bancorp., Inc. (a) 4,365,417
53,480 Golden State Bancorp., Inc. Warrants, 9/17/00 (a) 648,445
197,307 Golden State Bancorp, Inc. Litigation Tracking
Warrants (a) 308,292
60,000 Letchworth Independent Bancshares Corp. 828,750
69,566 Peoples Heritage Financial Group, Inc. 1,256,536
-----------
13,419,877 0.98%
-----------
Financial Insurance 200,000 Ambac Financial Group, Inc. 11,125,000
133,900 Capital Re Corp. 1,799,281
608,500 Enhance Financial Services Group, Inc. 12,626,375
1,000,000 Financial Security Assurance Holdings, Ltd. 52,562,500
394,673 MBIA Inc. 22,595,029
-----------
100,708,185 7.39%
-----------
</TABLE>
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
% OF
SHARES ISSUES VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONTINUED)
Food Manufacturers 328,000 J & J Snack Foods Corp. (a) $ 7,872,000
& Purveyors 197,200 Sbarro, Inc. 5,423,000
109,100 Weis Markets, Inc. 4,118,525
-----------
17,413,525 1.28%
-----------
Industrial Equipment 215,100 Alamo Group, Inc. 1,935,900 0.14%
-----------
Industrial - Japan 2,200,000 Toyoda Automatic Loom Works, Ltd. 40,770,941 2.99%
-----------
Insurance Holding 200,678 ACMAT Corp. Class A (a) (b) 2,608,814
Companies 803,669 Danielson Holding Corp. (a) (b) (c) 5,977,288
376,800 Leucadia National Corp. 8,171,850
432,300 Risk Capital Holdings, Inc. (a) 6,052,200
5,490 Sen-Tech International Holdings, Inc. (a) (c) 3,294,000
50,000 White Mountains Insurance Group Inc. 6,612,500
-----------
32,716,652 2.40%
-----------
Manufactured Housing 89,000 Liberty Homes, Inc. Class A 856,625
40,000 Liberty Homes, Inc. Class B 377,500
-----------
1,234,125 0.09%
-----------
Medical Supplies 145,500 Analogic Corp. 4,983,375
& Services 342,300 Datascope Corp. (a) 11,894,925
773,000 Hologic, Inc. (a) (b) 4,299,813
554,950 Prime Medical Services, Inc. (a) 4,231,494
913,900 Protocol Systems, Inc. (a) (b) 7,196,963
90,750 St. Jude Medical, Inc. (a) 3,374,766
-----------
35,981,336 2.64%
-----------
Natural Resources & 1,160,000 Alexander & Baldwin, Inc. 29,326,250
Real Estate 179,600 Catellus Development Corp. (a) 2,851,150
31,000 Consolidated-Tomoka Land Co. 478,562
550,000 Forest City Enterprises, Inc. Class A 14,437,500
7,500 Forest City Enterprises, Inc. Class B 202,031
</TABLE>
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
% OF
SHARES ISSUES VALUE NET ASSETS
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONTINUED)
Natural Resources & 955,000 Imperial Credit Commercial Mortgage Investment Corp. $ 10,505,000
Real Estate (continued) 1,180,336 Koger Equity, Inc. 21,246,048
14,600 LNR Property Corp. 320,288
846 Public Storage, Inc. 21,732
238,200 St. Joe Co. 5,955,000
3,045,508 Tejon Ranch Co. (b) (c) 89,652,142
------------
174,995,703 12.83%
------------
Non-Life Insurance-Japan 7,319,000 Mitsui Marine & Fire Insurance Co., Ltd. 39,127,432
6,056,000 The Chiyoda Fire & Marine Insurance Co., Ltd. 21,918,109
5,242,000 The Nissan Fire & Marine Insurance Co., Ltd. 16,000,523
3,246,000 The Sumitomo Marine & Fire Insurance Co., Ltd. (a) 20,891,711
1,020,800 The Tokio Marine & Fire Insurance Co., Ltd.,
Sponsored ADR 59,716,800
3,000,000 The Yasuda Fire & Marine Insurance Co., Ltd. 18,314,220
------------
175,968,795 12.90%
------------
Oil Services 500,000 Nabors Industries, Inc. (a) 11,656,250 0.86%
------------
Paper & Related
Products 126,605,679 Repap Enterprises Inc. (a) (b) 7,722,946 0.57%
------------
Security Brokers, 223,600 Jefferies Group, Inc. 6,456,450
Dealers & 893,332 Legg Mason, Inc. 31,266,620
Flotation Companies 1,086,250 Raymond James Financial, Inc. 23,286,484
------------
61,009,554 4.47%
------------
Semiconductor 400,000 Applied Materials, Inc. (a) 28,775,000
Equipment Manufacturers 1,748,000 AVX Corp. 54,843,500
and Related 1,004,500 C.P. Clare Corp. (a) (b) 7,031,500
1,600,300 Electro Scientific Industries, Inc. (a) (b) 61,011,437
1,882,500 Electroglas, Inc. (a) (b) 35,532,187
2,820,900 FSI International, Inc. (a) (b) 20,804,137
631,700 GaSonics International Corp. (a) 8,764,838
</TABLE>
- --------------------------------------------------------------------------------
10
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[GRAPHIC OMITTED]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
% OF
SHARES ISSUES VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONTINUED)
Semiconductor 369,200 KLA-Tencor Corp. (a) $ 25,013,300
Equipment Manufacturers 376,400 Lam Research Corp. (a) 20,843,150
and Related (continued) 300,000 Photronics, Inc. (a) 8,437,500
4,234,800 Silicon Valley Group, Inc. (a) (b) 54,523,050
1,425,100 SpeedFam-IPEC, Inc. (a) 14,028,328
663,200 Veeco Instruments, Inc. (a) 19,357,150
--------------
358,965,077 26.32%
--------------
Small-Cap Technology 108,750 AFC Cable Systems, Inc. (a) 4,139,297
230,000 Evans & Sutherland Computer Corp. (a) 3,105,000
424,000 Hypercom Corp. (a) 3,895,500
154,800 Integrated Systems, Inc. (a) 1,548,000
412,200 Planar Systems, Inc. (a) 2,782,350
612,000 Texas Micro, Inc. (a) 4,896,000
306,900 Vertex Communications Corp. (a) (b) 3,797,888
--------------
24,164,035 1.77%
--------------
Title Insurance 3,075,000 First American Financial Corp. 51,121,875
1,951,400 Stewart Information Services Corp. (b) 43,296,688
--------------
94,418,563 6.93%
--------------
TOTAL COMMON STOCKS AND WARRENTS
(Cost $891,586,210) 1,242,140,451
--------------
- ----------------------------------------------------------------------------------------------------------------
PREFERRED STOCK - 1.58%
Bermuda Based 581,563 CGA Group, Ltd., Series A (b) (c) 14,539,076
Financial Institutions 6,045,667 CGA Group, Ltd., Series C (b) (c) 7,039,176
--------------
21,578,252 1.58%
--------------
Insurance Companies 4,775 Ecclesiastical Insurance, 8.625% 9,653 0.00%
--------------
TOTAL PREFERRED STOCK
(Cost $19,364,429) 21,587,905
--------------
</TABLE>
- --------------------------------------------------------------------------------
11
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<PAGE>
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[GRAPHIC OMITTED]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES OR
INVESTMENT
AMOUNT % OF
SHARES ISSUES VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OTHER INVESTMENTS - 1.22%
Bermuda Based $2,215,000 ESG Partners, LP (c) $ 1,757,691 0.13%
-----------
Financial Institutions
Financial Insurance $15,000,000 American Capital Access Holdings, LLC (c) 15,000,000
$570,000 Insurance Partners II Equity Fund, LP (c) 570,000
-----------
15,570,000 1.14%
-----------
Foreign Currency Swap $50,000,000 Bear Stearns Currency Swap,
Contracts Termination Date10/26/99 (c) (e) (2,465,211)
$90,000,000 Bear Stearns Currency Swap,
Termination Date 4/22/00 (c) (f) (1,912,977)
-----------
(4,378,188) -0.32%
-----------
Foreign Option
Contracts $15,000,000 Japanese Yen January 2000 Put Options (c) (g) 56,438 0.00%
-----------
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%
-----------
TOTAL OTHER INVESTMENTS
(Cost $23,174,789) 16,673,282
-----------
- ----------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS - 2.63%
Repurchase Agreements $34,458,983 Bear Stearns 5.06%, due date August 2, 1999 (h) 34,458,983 2.53%
-----------
U.S. Treasury Bills $1,388,000 U.S. Treasury Bill 4.39%, 11/12/99 (i) 1,369,870 0.10%
-----------
TOTAL SHORT TERM INVESTMENTS
(Cost $35,829,966) 35,828,853
-----------
</TABLE>
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12
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[GRAPHIC OMITTED]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PORTFOLIO - 99.91%
(Cost $1,023,746,469) $1,362,407,726
--------------
CASH AND OTHER ASSETS
LESS LIABILITIES - 0.09% 1,222,669
--------------
NET ASSETS - 100.00% $1,363,630,395
==============
(Applicable to 40,363,982
shares outstanding)
NET ASSET VALUE PER SHARE $33.78
======
</TABLE>
Notes:
(a) Non-income producing securities.
(b) Affiliated issuers-as defined under the Investment Company Act of 1940
(ownership of 5% or more of the outstanding voting securities of these issuers).
(c) Restricted/fair valued securities.
(d) Interest accrued at a current rate of prime + 2%.
(e) The Fund is selling 6.0 billion Yen and paying an interest rate of 0.14% in
exhange for 50 million U.S. Dollars and an interest rate of 4.63%.
(f) The Fund is selling 10.6 billion Yen and paying an interest rate of 0.22% in
exhange for 90 million U.S. Dollars and an interest rate of 5.18%.
(g) 15 million U.S. Dollar notional amount may be exercised on January 10, 2000
to sell 1.9 billion Japanese Yen at a strike price of 125.00.
(h) Repurchase agreement collateralized by:
U.S. Treasury Strips, par value $10,530,000, 5.18%, matures 2/15/00: market
value $10,243,689.
U.S. Treasury Strips, par value $17,690,000, 6.59%, matures 5/15/15: market
value $6,412,625.
U.S. Treasury Strips, par value $13,977,000, 6.38%, matures 8/15/24: market
value $2,956,974.
U.S. Treasury Strips, par value $63,655,000, 6.53%, matures 11/15/21: market
value $15,535,639.
(i) Security segregated for future Fund commitments.
* Issuer in default.
ADR: American Depository Receipt.
- --------------------------------------------------------------------------------
13
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<PAGE>
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[GRAPHIC OMITTED]
THIRD AVENUE SMALL-CAP VALUE FUND
Dear Fellow Shareholders:
At July 31, 1999, the end of the third fiscal quarter of 1999, the unaudited net
asset value attributable to the 12,120,515 common shares outstanding of Third
Avenue Small-Cap Value Fund ("Small-Cap Value" or the "Fund") was $11.64,
compared with the Fund's unaudited net asset value at April 30, 1999 of $11.06.
At August 25, 1999, the unaudited net asset value was $11.57.
QUARTERLY ACTIVITY
During the quarter, Small-Cap Value added to four of its 40 existing positions,
and reduced or eliminated its holdings in four companies. At July 31, 1999,
Small-Cap Value held positions in 38 companies, the top 10 positions of which
accounted for approximately 41% of the Fund's net assets. At quarter's end,
approximately 8% of the Fund's assets were in cash.
NUMBER OF SHARES INCREASES IN EXISTING POSITIONS
29,100 Evans & Sutherland Computer Corp.
Common Stock ("E&S Common")
7,500 First American Financial Corp.
Common Stock
("First American Common")
18,500 Gleason Corp. Common Stock
("Gleason Common")
57,000 LaSalle Re Holdings, Ltd.
Common Stock ("LaSalle Common")
POSITIONS ELIMINATED OR REDUCED
80,600 Boston Communications Group, Inc.
Common Stock ("BCG Common")
167,400 Glenayre Technologies, Inc. Common Stock
("Glenayre Common")
16,000 Hologic, Inc. Common Stock
("Hologic Common")
50,000 PictureTel Corp. Common Stock
("PictureTel Common")
- --------------------------------------------------------------------------------
14
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<PAGE>
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[GRAPHIC OMITTED]
Small-Cap Value remained tight with the purse strings, choosing not to add any
new ideas during the quarter. The additions to existing positions have all been
discussed in previous letters. Therefore, most of my commentary concerns the
Fund's sales of existing positions, an activity the Fund undertakes very
reluctantly. The Fund's remaining position in Boston Communications stock was
sold at prices around $12 per share, more than double the Fund's average cost.
At $12 per share, BCG Common appeared fully valued, particularly as the
company's business faces new and potentially difficult challenges. In essence,
the Fund elected to take money out of a fully-priced holding - one with
measurably greater investment risk - and hold the cash for future allocation to
a "safe and cheap" situation.
The Fund also sold its remaining positions in Glenayre Common and PictureTel
Common, and continued to reduce its position in Hologic Common. Each of these
investments developed unacceptable flaws, translating to permanent impairments
of capital. In the case of Glenayre, the company made a bad acquisition and has
watched the quality of its balance sheet deteriorate substantially since our
initial purchase. PictureTel, once the leader in the videoconferencing industry,
dissipated much of its resources and is trying to shift its business model
radically. Hologic experienced disappointing sales of its osteoporosis
diagnostic systems. It recently made an expensive acquisition in an unrelated
business, increasing the risk profile of the business.
One of the great risks in selling, of course, is that business values are
dynamic. With the right formula, a company will tend to grow its business value
over time, with that value eventually surfacing in either the public stock
market or the private markets, values that a seller forgoes. Mindful of this
dynamic, sales of portfolio holdings - from a Third Avenue perspective - can be
attributed to one or more of four factors, the first three of which concern
investment risk and the last of which is a portfolio consideration.
In order of importance, these are: (1) the company dissipates its resources
(resulting in a permanent impairment of capital); (2) our original analysis was
flawed (either with regard to the business or pricing the security); (3) the
stock becomes grossly overvalued (diminishing the margin of safety); or (4) the
portfolio has needs (e.g., raising cash or improving tax consequences).
The Fund's sales this quarter reflect a combination of these factors, and
perhaps a bit more. In addition, the sales reflect an effort to improve the
overall quality of the portfolio by (a) more narrowly focusing on our best
ideas, consistent with our views about concentrated portfolios and (b)
maintaining a targeted level of cash (on the order of 5% to 10% of assets) that
serves as the "dry powder" when appropriate targets of opportunity arise.
I look forward to writing you again at the end of our fiscal year ending October
31, 1999.
Sincerely,
/s/ Curtis Jensen
- -----------------
Curtis Jensen
Co-manager, Third Avenue Small-Cap Value Fund
- --------------------------------------------------------------------------------
15
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<PAGE>
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[GRAPHIC OMITTED]
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
PORTFOLIO OF INVESTMENTS
AT JULY 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
% OF
SHARES ISSUES VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS - 91.94%
Bermuda Based Financial 99,500 LaSalle Re Holdings, Ltd. $ 1,623,094 1.15%
-----------
Institutions
Construction-Japan 431,900 Sawako Corp., Sponsored ADR (b) 2,645,388 1.87%
-----------
Financial Insurance 135,800 Capital Re Corp. 1,824,812
60,300 Financial Security Assurance Holdings Ltd. 3,169,519
113,324 MBIA Inc. 6,487,797
-----------
11,482,128 8.14%
-----------
Industrial Equipment 286,600 Alamo Group, Inc. 2,579,400
161,600 Gleason Corp. (b) 2,605,800
-----------
5,185,200 3.67%
-----------
Life Insurance 179,000 FBL Financial Group, Inc. Class A 3,635,938 2.58%
-----------
Manufactured Housing 184,300 Skyline Corp. 5,586,594 3.96%
-----------
Media 139,700 ValueVision International, Inc. Class A (a) 3,667,125 2.60%
-----------
Medical Supplies 68,000 Hologic, Inc (a) 378,250
& Services 278,000 Protocol Systems, Inc. (a) 2,189,250
-----------
2,567,500 1.82%
-----------
Natural Resources & 187,500 Alexander & Baldwin, Inc. 4,740,234
Real Estate 241,400 Alico, Inc. 3,983,100
238,500 Avatar Holdings, Inc. (a) (b) 4,501,687
126,900 Cabot Industrial Trust (b) 2,585,587
234,300 Deltic Timber Corp. 5,711,062
206,000 Koger Equity, Inc. 3,708,000
200,000 Tejon Ranch Co. (d) 5,887,500
1,104,700 The TimberWest Forest Corp. (Canada) 8,653,960
-----------
39,771,130 28.19%
-----------
Non-Life 2,425,000 The Nissan Fire & Marine
Insurance-Japan Insurance Co., Ltd. 7,401,997 5.25%
-----------
</TABLE>
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16
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[GRAPHIC OMITTED]
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
% OF
SHARES ISSUES VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS (CONTINUED)
Paper & Related 13,000,000 Repap Enterprises Inc. (a) $ 793,000 0.56%
------------
Products
Retail 426,100 HomeBase, Inc. (a) (b) 2,210,394
261,700 Value City Department Stores, Inc. (a) 3,222,181
------------
5,432,575 3.85%
------------
Semiconductor 520,000 C.P. Clare Corp. (a) (c) 3,640,000
Equipment Manufacturers 154,500 Electroglas, Inc. (a) 2,916,188
and Related 417,400 FSI International, Inc. (a) 3,078,325
164,200 Silicon Valley Group, Inc. (a) 2,114,075
309,200 SpeedFam-IPEC, Inc. (a) 3,043,688
------------
14,792,276 10.49%
------------
Technology 275,000 ACT Networks, Inc. (a) 4,279,687
25,000 Bel Fuse, Inc. Class A (a) 796,875
40,700 Bel Fuse, Inc. Class B (a) 1,134,512
326,900 Centigram Communications Corp. (a) (c) 2,942,100
187,400 Evans & Sutherland Computer Corp. (a) 2,529,900
370,300 Planar Systems, Inc. (a) (b) 2,499,525
101,500 Rofin-Sinar Technologies, Inc. (a) (b) 685,125
490,600 SpecTran Corp. (a) (c) 4,354,075
108,400 Xircom, Inc. (a) 3,462,025
------------
22,683,824 16.08%
------------
Title Insurance 146,500 First American Financial Corp. 2,435,563 1.73%
------------
TOTAL COMMON STOCKS
(Cost $138,332,606) 129,703,332
------------
</TABLE>
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17
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[GRAPHIC OMITTED]
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL % OF
AMOUNT($) ISSUES VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OTHER INVESTMENTS - 0.01%
Foreign Option
Contracts 6,500,000 Japanese Yen February 2000 Put Options (d) (e) $ 16,250 0.01%
------------
TOTAL OTHER INVESTMENTS
(Cost $217,750) 16,250
------------
- ----------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS - 8.01%
Repurchase Agreements 11,301,688 Bear Stearns 5.06%, due date August 2, 1999 (f) 11,301,688 8.01%
------------
TOTAL SHORT TERM INVESTMENTS
(Cost $11,301,688) 11,301,688
------------
TOTAL INVESTMENT PORTFOLIO - 99.96%
(Cost $149,852,044) 141,021,270
------------
CASH AND OTHER ASSETS
LESS LIABILITIES - 0.04% 55,063
------------
NET ASSETS - 100.00% $141,076,333
(Applicable to 12,120,515 ============
shares outstanding)
NET ASSET VALUE PER SHARE $11.64
======
</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:
Countrywide Home Loans, Inc., par value $6,039,149, 9.67%, matures 11/15/28:
market value $4,486,083.
Residential Asset Securitization Trust, par value $5,708,645, 6.50%, matures
10/25/13: market value $4,788,734.
GE Capital Mortgage Services, Inc., par value $6,302,950, 9.61%, matures
10/25/28: market value $280,442.
Residential Funding Mortgage Securities I, par value $7,290,000, 9.25%,
matures 10/25/28: market value $1,382,355.
PNC Mortgage Securities Corp., par value $3,860,000, 6.50%, matures 1/25/29:
market value $593,167.
ADR: American Depository Receipt.
- --------------------------------------------------------------------------------
18
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[GRAPHIC OMITTED]
THIRD AVENUE HIGH YIELD FUND
Dear Fellow Shareholders:
At July 31, 1999, the unaudited net asset value attributable to the 885,541
common shares outstanding of the Third Avenue High Yield Fund ( the "Fund") was
$9.89 per share. On June 30, 1999, the most recent dividend date, the Fund paid
$0.167 per share in dividends, representing income received from the Fund's
holdings of fixed income securities. Since the end of the Fund's last fiscal
year, ending on October 31, 1998, when the Fund's net asset value was $8.50, a
total of $0.517 per share has been paid in dividends. On April 30, 1999, the
last day of the Fund's second quarter, the net asset value per share was $9.41.
At August 25, 1999, the net asset value per share was $9.87.
QUARTERLY ACTIVITY
During the third quarter of fiscal 1999, the Fund eliminated three positions,
reduced one position, and established two new positions, as shown below.
PAR VALUE
OR
NUMBER OF SHARES POSITIONS ELIMINATED
6,000 shares Budget Group Capital Trust 144A 6.25%, due 6/15/05
5,000 shares Coltec Capital Trust 144A 5.25%, due 4/15/28
$500,000 Webb (Del E.) Corp. 10.25%, due 2/15/10
REDUCTION IN EXISTING POSITION
$250,000 MidAmerican Energy Holdings Co.
8.48%, due 9/15/28
Our holding of Coltec Capital Trust preferred shares was sold at a valuation
level which reflected its then pending acquisition of this maker of aerospace
and industrial products by B.F. Goodrich. We felt we could better reinvest the
assets in other high yielding issues. The position of bonds issued by the major
home builder Del Webb Corp. was eliminated in order to invest the proceeds in
issues of companies which we judged to offer a more likely possibility of
capital appreciation, along with high current income.
Our position in MidAmerican Energy bonds was reduced, subsequent to an upgrade
in its bond ratings from speculative grade Ba1/BB+ to investment grade Baa3/BBB-
by the two major rating services Moody's and Standard & Poors. We felt a smaller
holding would more appropriately reflect our outlook for this improved electric
and gas utility credit.
- --------------------------------------------------------------------------------
19
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<PAGE>
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[GRAPHIC OMITTED]
PAR VALUE NEW POSITIONS ACQUIRED
$500,000 Safeguard Scientifics, Inc. 144A 5.00%
due 6/15/06
$100,000 Adaptive Broadband Corp. 5.25%, due 12/15/03
Safeguard Scientifics is a diversified information technology holding company
established in 1953. Since the 1980's, it has identified, acquired, operated and
managed information technology companies. At the present time, Safeguard
Scientifics is focusing on internet related opportunities in e-commerce,
enterprise applications, and network infrastructure activities. It currently
holds interests in 28 partnership companies and eight private equity funds,
which together have investments in over 100 enterprises.
The company generally acquires ownership interests in corporations that allow
Safeguard Scientifics to have a significant influence over their direction and
management by establishing a team to work closely with the managers. Typically,
it is the largest shareholder in its partnership companies.
Adaptive Broadband Corp. was, historically, a supplier of communications
products for the defense industry. After several corporate reorganizations, it
has sold its defense business and is now focusing on wireless communications
products, particularly those products used in high growth internet applications.
Its satellite communications division makes products for major international
telecommunications companies. Its terrestrial division produces radios and
related products for wireless communications companies to transmit voice and
data.
PORTFOLIO STRUCTURE
The table below lists our largest concentrations for the portfolio as of July
31, 1999, reflecting our emphasis on industries which
we feel represent attractive value.
INDUSTRY PERCENTAGE OF TOTAL ASSETS
- -------- --------------------------
Telecommunications 16.88%
Semiconductor capital equipment 15.07%
Diversified technology 14.13%
Energy 7.01%
Electric and gas utilities 6.92%
Our weightings in telecommunications, semiconductor capital equipment, and other
technology companies have increased moderately over the quarter, owing to
capital appreciation in those holdings. This increase in value reflects an
optimistic outlook for these industries over the next few years, as they
continue to grow much faster than the general economy.
As discussed above, over the quarter, we decreased somewhat our holdings in real
estate and electric utility issues. Our position in energy-related issues now
amounts to 7.01%. With a more positive outlook for energy prices from the levels
earlier in the year--when in real terms oil prices had reached 50 year lows--our
holdings have improved in price over the past three months.
- --------------------------------------------------------------------------------
20
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[GRAPHIC OMITTED]
As we look ahead over the balance of the year, we remain optimistic that the
growing U.S. economy, its efficient workers and capital investment, and our
historically low interest rates will provide an attractive backdrop for
investors focused on long-term results. Because increasing numbers of
individuals have become drawn to short-term securities trading due to low
transaction costs and easy market access through the internet, we expect large
short-term swings in securities prices to be the norm, often temporarily
obscuring where real investment values lie. We prefer to focus our efforts on
in-depth research of our companies and the industries in which they operate and
not have our efforts diluted by reacting to short-term price swings.
Sincerely,
/s/ Margaret D. Patel
- ---------------------
Margaret D. Patel
Manager, Third Avenue High Yield Fund
- --------------------------------------------------------------------------------
21
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<PAGE>
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[GRAPHIC OMITTED]
THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
PORTFOLIO OF INVESTMENTS
AT JULY 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL % OF
AMOUNT($) ISSUES VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONVERTIBLE BONDS - 62.89%
Capital Equipment - 450,000 Lam Research Corp. 5.00%, due 9/1/02 $ 432,563 4.94%
Semiconductors ----------
Computers - Memory 300,000 HMT Technology Corp. 5.75%, due 1/15/04 109,125 1.24%
Devices ----------
Computer Software 500,000 Safeguard Scientifics, Inc. 144A 5.00%, due 6/15/06 531,250 6.07%
& Services ----------
Electric Utility
Services 400,000 tron, Inc. 6.75%, due 3/31/04 273,000 3.12%
----------
Electronic Components - 325,000 Atmel SA 144A 3.25%, due 6/1/02 357,906
Semiconductors 325,000 Cypress Semiconductors Corp. 6.00%, due 10/1/02 (b) 353,438
----------
711,344 8.12%
----------
Instrumentation - 500,000 Credence Systems Corp. 5.25%, due 9/15/02 461,250 5.27%
Electronic Testing ----------
Lasers - 450,000 Cymer, Inc. 144A 3.50%, due 8/6/04 425,812 4.86%
Systems/Components ----------
Medical - Generic Drugs 275,000 Alpharma, Inc. 144A 5.75%, due 4/1/05 387,063 4.42%
----------
Medical - Hospitals 625,000 Columbia\HCA Medical Care, Int'l. 6.75%, due 10/1/06 529,687 6.05%
----------
Medical Management 505,000 PhyMatrix Corp. 6.75%, due 6/15/03 243,662 2.78%
Services ----------
Networking 425,000 Adaptec, Inc. 4.75%, due 2/1/04 417,563 4.77%
----------
Oil/Gas Exploration 300,000 Range Resources Corp. 6.00%, due 2/1/07 185,625
300,000 Pogo Producing Co. 5.50%, due 6/15/06 237,000
----------
422,625 4.82%
----------
Oil Field Services 300,000 Key Energy Group, Inc. 5.00%, due 9/15/04 192,375 2.19%
----------
Telecommunications - 500,000 P-Com, Inc. 4.25%, due 11/1/02 278,125
Wireless 100,000 Adaptive Broadband Corp. 5.25%, due 12/15/03 93,000
----------
371,125 4.24%
----------
TOTAL CONVERTIBLE BONDS
(Cost $6,003,316) 5,508,444
----------
</TABLE>
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22
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[GRAPHIC OMITTED]
THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
% OF
SHARES ISSUES VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONVERTIBLE PREFERRED STOCk - 17.54%
Auto Parts Original 7,000 Breed Technologies, Inc. 6.50%, due 11/15/27 $ 35,000 0.40%
----------
Electric Utility Services 4,000 K N Energy, Inc. 8.25%, due 11/30/01 128,250
4,000 Texas Utilities 9.25%, due 8/16/01 216,250
----------
344,500 3.93%
----------
Insurance 5,000 Conseco Finance Trust IV 7.00%, due 2/16/01 (b) 188,750 2.16%
----------
Medical - 9,000 Sun Financing I 144A 7.00%, due 5/1/28 3,375 0.04%
----------
Long Term/Subacute
Telecommunications - 5,000 Winstar Communications, Inc. 144A 7.00%, due 3/15/10 306,875 3.50%
----------
Wireless
Telephone Services 5,000 NEXTLINK Communications, Inc. 144A 6.50%, due 3/31/10 658,125 7.51%
----------
TOTAL CONVERTIBLE PREFERRED STOCK
(Cost $1,697,137) 1,536,625
----------
PRINCIPAL
AMOUNT ($)
- ----------------------------------------------------------------------------------------------------------------
CORPORATE BONDS - 16.66%
Building and
Construction Products 250,000 NCI Building Systems, Inc. 144A 9.25%, due 5/1/09 247,500 2.83%
----------
Electric Utility
Services 250,000 MidAmerican Energy Holdings Co. 8.48%, due 09/15/28 262,187 2.99%
----------
Real Estate - Commercial 500,000 BF Saul REIT 9.75%, due 4/1/08 475,000 5.42%
----------
Telephone Services 500,000 Level 3 Communications, Inc. 9.125%, due 5/1/08 (b) 475,000 5.42%
----------
TOTAL CORPORATE BONDS
(Cost $1,498,107) 1,459,687
----------
SHARES
- ----------------------------------------------------------------------------------------------------------------
Common Stocks - 0.45%
Telecommunications - 744 Winstar Communications, Inc. (a) 39,060 0.45%
----------
Wireless
TOTAL COMMON STOCK
(Cost $21,778) 39,060
----------
</TABLE>
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23
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[GRAPHIC OMITTED]
THIRD AVENUE TRUST
THIRD AVENUE HIGH YIELD FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL % OF
AMOUNT($) ISSUES VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHORT TERM INVESTMENTS - 1.34%
Repurchase Agreements 117,662 Bear Stearns 5.06%, due date August 2, 1999 (c) $ 117,662 1.34%
----------
Total Short Term Investments
(Cost $117,662) 117,662
----------
Total Investment Portfolio - 98.88%
(Cost $9,338,000) 8,661,478
----------
Cash and Other Assets
Less Liabilities - 1.12% 97,740
----------
NET ASSETS - 100.00% $8,759,218
(Applicable to 885,541 ==========
shares outstanding)
NET ASSET VALUE PER SHARE $9.89
=====
</TABLE>
NOTES:
(a) Non - income producing security.
(b) Securities in whole or in part on loan
(c) Repurchase agreement collateralized by:
U.S. Treasury Strips, par value $125,000, 5.18%, matures 2/15/00: market
value $121,601.
- --------------------------------------------------------------------------------
24
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[GRAPHIC OMITTED]
THIRD AVENUE REAL ESTATE VALUE FUND
Dear Fellow Shareholders:
At July 31, 1999, the end of our third fiscal quarter, the unaudited net asset
value attributable to the 671,489 shares outstanding of the Third Avenue Real
Estate Value Fund (the "Fund") was $11.74 per share. This compares with the
Fund's audited net asset value at October 31, 1998 of $10.28 per share and the
unaudited net asset value at January 31, 1999 and April 30, 1999 of $10.82 and
$11.26 per share, respectively. As of August 25, 1999, the unaudited net assets
totaled $7,781,326, attributable to the 681,396 common shares outstanding with a
net asset value of $11.42 per share.
QUARTERLY ACTIVITY
During the third quarter of fiscal 1999, the Fund established new positions in
the common stock of one company, and increased its position in the common stocks
of 15 companies. At July 31, 1999, the Fund held positions in 21 companies, and
was approximately 85% invested. The Fund's top 10 positions accounted for
approximately 56% of the Fund's net assets. The Fund did not reduce or sell any
positions during the quarter.
NUMBER OF SHARES POSTITION ACQUIRED
8,100 AMRESCO Capital Trust Inc. ("AMRESCO Common")
NUMBER OF SHARES INCREASES IN EXISTING POSITIONS
17,500 Aegis Realty, Inc. ("Aegis Common")
17,000 Anthracite Capital, Inc. ("Anthracite Common")
13,000 Avatar Holdings, Inc. ("Avatar Common")
19,200 Commercial Assets, Inc. ("Commercial Common")
1,700 Consolidated-Tomoka Land Co. ("Consolidated Common")
8,500 Echelon International Corp., Inc. ("Echelon Common")
13,500 First American Financial Corp. ("First American Common")
2,100 Forest City Enterprises, Inc. Class A ("Forest City Common")
35,000 Imperial Credit Commercial Mortgage Investment Corp.
("Imperial Common")
3,000 Koger Equity, Inc. ("Koger Common")
12,000 LNR Property Corp. ("LNR Common")
5,000 Prime Group Realty Trust ("Prime Common")
7,000 Security Capital Group, Inc. Class B ("Security Capital
Common")
19,600 United Investors Realty Trust ("United Common")
6,800 Wellsford Real Properties, Inc. ("Wellsford Common")
- --------------------------------------------------------------------------------
25
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<PAGE>
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[GRAPHIC OMITTED]
AMRESCO Capital Trust is the Fund's fourth investment in a mortgage real estate
investment trust (REIT). AMRESCO completed its IPO in May 1998 and was organized
to invest in senior mortgage loans, mezzanine loans, commercial mortgage-backed
securities, commercial real estate and other opportunistic investments in real
estate. AMRESCO is a small-cap REIT (about $100 million in market
capitalization) whose common stock has a book value of about $13.00 per share
(after mark-to-market adjustments). Our cost basis for AMRESCO Common is $10.37.
The company's assets consist primarily of first mortgage and mezzanine loans on
commercial properties. The loans tend to be higher risk (higher loan-to-value)
than conventional commercial loans, but the equity-like yields, which average
about 12%, make the risk/reward ratio very attractive. Additionally, AMRESCO is
conservatively financed with a debt-to-assets ratio of only 25%. The Fund
acquired AMRESCO Common at a substantial discount to our estimate of net asset
value and, based upon the recently announced dividend, our current yield is
about 15%.
As of July 31, 1999, the Fund had investments in 21 companies. Eleven (about 42%
of assets) of these positions represent the Fund's long-term, core holdings in
real estate development, natural resource and title insurance companies. Each of
these well-financed companies appears to be well managed and seems to have
excellent long-term growth prospects. Of course, the Fund's investments in these
companies were made at prices that represent substantial discounts from our
estimates of net asset value. Some of the Fund's core investments have already
provided decent unrealized gains. But even at current levels, they are still
cheap and we continue adding to our positions as we receive new funds.
Nine of the Fund's positions (about 40% of assets) are in small-cap real estate
investment trusts (REITs), including four mortgage REITs and five equity REITs.
Each REIT meets our stringent standards of safe and cheap and most have very
high dividend yields. However, we believe that few, if any, of these positions
will become long-term, core holdings. Each has high-quality assets that are
conservatively financed and the Fund's investments were made at a substantial
discount to net asset value. However, due to their small market cap and the fact
that their stocks trade at large discounts to net asset value, these companies
will have difficulty accessing equity capital without substantially diluting
existing shareholders. Furthermore, internal growth will be limited without
adding debt. As a result, we believe that resource conversions will be the most
likely tools employed by management to realize the full value of their assets.
Resource conversions will include liquidations, going-private transactions
(management buyouts, etc.) and mergers with larger public companies for cash or
stock. Two of the Fund's REIT holdings are already in the process of major
resource conversions. Imperial Credit Commercial Mortgage Investment Corp. has
entered into a definitive agreement to be acquired, and Chastain Capital Corp.
has announced that it will conduct an orderly liquidation of the company. In
both instances, the Fund will realize substantial gains if the transactions
close. It is impossible to estimate when resource conversions may occur for the
other REITs in our portfolio, but the high dividends continue to give us a very
attractive yield while we wait.
The Fund's largest purchase during the quarter was its addition to Imperial
Common. The Fund started buying Imperial Common last fall because the stock was
very cheap relative to net asset value. The assets were primarily performing
mortgage loans, the balance sheet was strong, and the dividend yield was very
high. We considered Imperial to be a prime candidate for a resource conversion
based on management's statements regarding the available options for the
company, which included liquidation or a merger. On May 12, 1999, Imperial
Credit Industries (ICII), a 10% shareholder and the manager of Imperial (through
a subsidiary), offered to buy all outstanding Imperial Common for $11.00 per
share. After ICII's initial announcement,the price for Imperial Common increased
and the stock went from a terrific value investment to a terrific risk
arbitrage. The stock was still trading at a significant discount to net asset
value and we believed there was a high likelihood that a deal would get done,
and probably at a higher price than the initial $11.00 bid. We opposed the
transaction and encouraged Imperial's independent directors
- --------------------------------------------------------------------------------
26
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<PAGE>
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[GRAPHIC OMITTED]
to reject the bid and seek a higher bid or give consideration to an orderly
liquidation of the company's assets. On June 11, 1999, ICII increased its bid to
$11.50 per share. On July 22, 1999 Imperial announced that it entered into a
definitive merger agreement with ICII pursuant to which Imperial Common would be
acquired at $11.50 per share, subject to increase based upon the results of an
appraisal of ICII's management agreement with Imperial. Additionally, other
interested parties may submit competing bids for 60 days and Imperial may
terminate the merger agreement in favor of a superior proposal.
I look forward to writing to you again when we publish our Annual Report for the
period ending October 31, 1999.
Sincerely,
/s/ Michael H. Winer
- --------------------
Michael H. Winer
Co-manager, Third Avenue Real Estate Value Fund
- --------------------------------------------------------------------------------
27
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<PAGE>
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[GRAPHIC OMITTED]
THIRD AVENUE TRUST
THIRD AVENUE REAL ESTATE VALUE FUND
PORTFOLIO OF INVESTMENTS
AT JULY 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
% OF
SHARES ISSUES VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS - 85.24%
Natural Resources 6,500 Deltic Timber Corp. $ 158,437
4,000 The TimberWest Forest Corp. (Canada) 31,335
----------
189,772 2.41%
----------
Real Estate Development 28,000 Avatar Holdings, Inc. (a) 528,500
7,000 Catellus Development Corp. (a) 111,125
9,700 Consolidated-Tomoka Land Co. 149,744
17,400 Echelon International Corp., Inc. (a) 377,362
18,100 Forest City Enterprises, Inc. Class A 475,125
21,000 LNR Property Corp. 460,687
11,500 St. Joe Co. (b) 287,500
32,800 Wellsford Real Properties, Inc. (a) 332,100
----------
2,722,143 34.53%
----------
Real Estate Holding
Company 25,500 Security Capital Group, Inc. Class B (a) (b) 384,094 4.87%
----------
Real Estate Investment
Trust 38,500 Aegis Realty, Inc. 363,344
8,100 AMRESCO Capital Trust Inc. 82,519
52,500 Anthracite Capital, Inc. 374,062
31,000 Chastain Capital Corp. 218,938
53,700 Commercial Assets, Inc. 295,350
67,000 Imperial Credit Commercial Mortgage Investment Corp.(b) 737,000
17,000 Koger Equity, Inc. 306,000
19,000 Prime Group Realty Trust 320,625
44,600 United Investors Realty Trust 334,500
----------
3,032,338 38.47%
----------
Title Insurance 23,500 First American Financial Corp. 390,688 4.96%
----------
TOTAL COMMON STOCKS
(Cost $6,171,968) 6,719,035
----------
</TABLE>
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28
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[GRAPHIC OMITTED]
THIRD AVENUE TRUST
THIRD AVENUE REAL ESTATE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL % OF
AMOUNT ($) ISSUES VALUE NET ASSETS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHORT TERM INVESTMENTS - 0.01%
Repurchase Agreements 708 Bear Stearns 5.06%, due date August 2, 1999 (c) $ 708 0.01%
----------
TOTAL SHORT TERM INVESTMENTS
(Cost $708) 708
----------
TOTAL INVESTMENT PORTFOLIO - 85.25%
(Cost $6,172,676) 6,719,743
----------
CASH AND OTHER ASSETS
LESS LIABILITIES - 14.75% 1,162,992
----------
NET ASSETS - 100.00% $7,882,735
(Applicable to 671,489 ==========
shares outstanding)
NET ASSET VALUE PER SHARE $11.74
======
</TABLE>
Notes:
(a) Non-income producing securities.
(b) Securities in whole or in part on loan.
(c) Repurchase agreement collateralized by:
U.S. Treasury Strips, par value $5,000, 5.18%, matures 2/15/00: market value
$4,864.
- --------------------------------------------------------------------------------
29
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<PAGE>
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
First Data Investor Services Group, Inc.
3200 Horizon Drive
P.O. Box 61503
King of Prussia, PA 19406-0903
(610) 239-4600
(800) 443-1021 (toll-free)
INVESTMENT ADVISER
EQSF Advisers, Inc.
767 Third Avenue
New York, NY 10017-2023
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
CUSTODIAN
Custodial Trust Company
101 Carnegie Center
Princeton, NJ 08540-6231
[GRAPHIC OMITTED]
THIRD AVENUE FUNDS
767 THIRD AVENUE
NEW YORK, NY 10017-2023
PHONE (212) 888-5222
TOLL FREE (800) 443-1021
FAX (212) 888-6757
WWW.THIRDAVENUEFUNDS.COM
