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[THIRD AVENUE FUNDS]
THIRD AVENUE VALUE FUND
THIRD AVENUE SMALL-CAP VALUE FUND
THIRD AVENUE REAL ESTATE VALUE FUND
FIRST QUARTER REPORT
(Unaudited)
---------------
January 31, 2000
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[THIRD AVENUE FUNDS]
THIRD AVENUE VALUE FUND
Dear Fellow Shareholders:
At January 31, 2000, the unaudited net asset value attributable to the
38,460,778 common shares outstanding of the Third Avenue Value Fund ("TAVF",
"Third Avenue" or the "Fund") was $37.23 per share. This compares with a net
asset value of $34.40 per share at October 31, 1999, and a net asset value at
January 31, 1999 of $32.76 per share, both as adjusted for a subsequent
distribution to stockholders. At February 23, 2000, the net asset value was
$38.99 per share.
QUARTERLY ACTIVITY
Share redemptions dried up during the most recent quarter. The number of shares
of common stock outstanding at January 31, 2000 was virtually identical to the
number of shares of common stock outstanding at October 31, 1999.
During the quarter, one new subordinated debenture position was acquired and
four new common stock positions were created EITHER DE NOVO or reinstated. Two
common stock positions - Tompkins Trustco, Inc. Common Stock and ACE Ltd. Common
Stock - were created out of mergers which resulted in exchanges for common
stocks formerly held in the TAVF portfolio. Six common stock positions were
increased during the quarter.
The Fund eliminated five positions during the quarter of which three were the
results of the companies being acquired. One position, Lam Research Common, was
eliminated because the issue appeared to be grossly overpriced; and one issue,
Covance Common Stock, was sold because of a decision to concentrate our
investments in the common stocks of Clinical Research Organizations ("CROs") in
three other issues. Five existing positions were decreased essentially because
of a desire to lighten up on holdings of semi-conductor equipment common stocks,
which, at the end of the quarter, accounted for 34% of the Fund's net assets:
PRINCIPAL AMOUNT
OR
NUMBER OF SHARES NEW POSITIONS ACQUIRED
$24,839,000 CareMatrix Corp. 6.25% due 8/15/2004
("CareMatrix Subordinates")
87,035 shares ACE Ltd. Ordinary Shares ("ACE Common")
33,000 shares D.R. Horton, Inc. Common Stock ("Horton Common")
347,000 shares Kendle International Inc. Common Stock ("Kendle Common")
41,100 shares Tompkins Trustco, Inc. Common Stock ("Tompkins Common")
379,000 shares The Nissan Fire & Marine Insurance Co., Ltd. Common Stock
("Nissan Common")
92,300 shares Woronoco Bancorp Common Stock ("Woronoco Common")
1
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NUMBER OF SHARES INCREASES IN EXISTING POSITIONS
183,800 shares Alamo Group, Inc. Common Stock ("Alamo Common")
464,000 shares The Chiyoda Fire and Marine Insurance Co., Ltd. Common Stock
("Chiyoda Common")
134,000 shares Financial Security Assurance Holdings, Ltd. Common Stock
("FSA Common")
420,900 shares PAREXEL International Corp. Common Stock ("PAREXEL Common")
327,000 shares Pharmaceutical Product Development, Inc. Common Stock
("PPD Common")
17,700 shares Tecumseh Products Co. Class B Common Stock
("Tecumseh Common")
REDUCTIONS IN EXISTING POSITIONS
48,000 shares AVX Corp. ("AVX Common")
300,000 shares Applied Materials, Inc. Common Stock
("Applied Materials Common")
100,300 shares Electro Scientific Industries, Inc. Common Stock
("Electro Scientific Common")
231,700 shares GaSonics International Corp. Common Stock
("GaSonics Common")
169,200 shares KLA-Tencor Corp. Common Stock ("KLA Common")
POSITIONS ELIMINATED
133,900 shares Capital Re Corp. Common Stock
("Cap Re Common")
100,000 shares Covance Inc. Common Stock
("Covance Common")
376,400 shares Lam Research Corp. Common Stock
("Lam Common")
60,000 shares Letchworth Independent Bancshares Corp.
("Letchworth Common")
108,750 shares Tyco International Ltd. Common Stock
("Tyco Common")
The CareMatrix Subordinates were acquired at a yield to maturity of almost 36%.
CareMatrix, which manages assisted living facilities for the elderly in the
U.S., probably will continue to service its debt. If not, the CareMatrix
Subordinates ought to work out okay, compared with our cost, in the event of a
reorganization, either out-of-court or in Chapter 11. TAVF owns over 20% of the
outstanding issue of CareMatrix Subordinates and, thus, is likely to be
influential in the event the company seeks to reorganize and tries to preserve
any values for CareMatrix Common Stock.
The common stocks of leading homebuilders, such as D.R. Horton, seem to be as
depressed as the title insurers in whose common stocks the Fund has relatively
large investments, First American Financial and Stewart Information Services.
All three of these common stocks appear to be issues of fine companies and all
three are likely to be influenced by the same general economic trends, as
measured essentially by housing starts. The outlooks for 2000, and
2
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probably 2001, seem to be not as good as what was achieved in 1999, which to me
seems hardly a reason why these common stocks should be so depressed so that
they are selling at less than nine times average annual earnings achieved over
the last housing cycle and less than three to four times earnings achieved at
the most recent cyclical top.
Small, extremely well capitalized depository institutions, whose common stocks
sell at substantial discounts from book value, have been an attractive arena for
TAVF since the Fund's inception in 1990. Two such issues are Tompkins Common and
Woronoco Common.
Because of the Fund's continued involvement with Innovative Clinical Solutions,
Ltd. ("ICSL"), as the largest holder of ICSL Subordinates, it has become
increasingly apparent that leading CRO's have excellent growth potentials and
that various common stocks are currently available at attractive prices. Thus,
during the quarter new, or expanded, investments were made into Kendle Common,
PAREXEL Common and PPD Common.
TAVF sold its entire position in Nissan Common in the last fiscal year in order
to realize losses for U.S. income tax purposes. The Fund is now reestablishing
its position because of a view that Nissan, of all the Japanese non-life
insurers held by TAVF, is the most likely take-over candidate.
It is part of the Fund's "style" to acquire the common stocks of well financed,
prospering companies when Third Avenue can buy in at prices representing
substantial discounts from what insiders paid for the same common stocks in the
recent past. In December 1999, insiders acquired slightly over 2,000,000 newly
issued shares of FSA Common at $54.20 per share; in January 2000, TAVF acquired
114,000 shares of FSA Common at an average price of $44.76 per share. In
September 1998, Toyota Motor increased its interest in Chiyoda Common from 37%
to 47% of the outstanding issue by buying Chiyoda Common at 500 yen; in January
2000, TAVF acquired 464,000 shares of Chiyoda Common at an all-in price of less
than 285 yen.
Both Alamo Group and Tecumseh Products are industrial companies which seem to be
prospering. The prices of these common stocks, however, seem unusually depressed
whether measured by price-earnings ratios, price to asset value ratios or
historic market prices for the common stocks.
Tyco Common Stock was received by the Fund in connection with the Tyco
acquisition of AFC Cable. The Fund sold Tyco Common, a high PE ratio common
stock.
GARP VS. GADCP
GARP stands for "Growth at a Reasonable Price." GARP is a usual standard for
growth investing in the financial community by Outside, Passive, Minority
Investors ("OPMIs"), such as mutual funds or individual investors. GADCP stands
for "Growth at Dirt Cheap Prices" which is what TAVF tries to accomplish in
making most of its investments.
GARP analysis tends to be quite different from GADCP analysis.
GARP analysis focuses strictly on forecasting future flows, - whether such flows
are revenues, earnings or cash. An attractive common stock purchase is deemed to
exist where future forecasted growth rates are greater than current ratios of
price to flows. Thus, a common stock usually is deemed attractive under a GARP
analysis if the common stock is
3
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selling at 20 times earnings and the forecasted future growth rate for earnings
is something more than 20% compounded, say 25% compounded. However, the same
common stock under a GARP analysis would not be attractively priced at 20 times
earnings if the future growth rate were estimated to be something less than 20%
per annum compounded.
In GARP analysis, heavy weight is placed on the past earnings record. Indeed, in
much of GARP analysis it is assumed, in linear fashion, that future growth rates
will approximate the growth rates achieved over the past one to five years.
Rarely, if ever, is any weight at all given to balance sheet considerations in
making forecasts, whether those balance sheet considerations involve the quality
of resources in a business or the quantity of resources existing in a firm.
GARP analysis tends to revolve around a very short-run focus. If the immediate
revenue, earnings, or cash flow outlooks are poor, common stock investment is to
be foregone regardless of long-term prospects. A corollary of this is that the
typical GARP securities buyer is short-run oriented and tries to buy at, or
near, bottoms for securities prices.
Industry identification is very important in GARP; the securities buyer wants to
get into industries that are generally recognized as growth industries in the
financial community, say dot.com or telecommunications. Quite often, there is no
independent analysis of growth potential, but rather only an acceptance of the
generally recognized consensus. The underlying problem with going along with the
generally recognized consensus is that the investor tends to buy what is popular
when it is most popular. In other words, the investor has to pay up.
Historically, buying what is popular when it is most popular has been a
prescription for disaster for investors, whether it was acquiring RCA Common in
1929, real estate tax shelters in 1985, or junk bonds in 1988.
In GADCP in general, and in the TAVF portfolio in particular, there is no
emphasis on estimating future flows. Rather it is recognized that growth in
common stock prices can come, and frequently does come, from sources other than
corporate operations. Growth can come from judicious acquisitions (Capital
Southwest Common); creating unrealized, and unrecorded, appreciation in asset
values (Forest City Enterprise Common); creating "hidden assets" in the form of
increases in adjusted book value (Legg Mason Common or FSA Common); having
companies taken over by others at premium prices (AFC Cable Common or Integrated
Systems Common); and possibly participating in corporate restructurings (ICSL
Subordinates).
In forecasting future flows of revenues, earnings, or cash flows, no exclusivity
in making these forecasts is given to the past earnings record under a GADCP
analysis. It is recognized under GADCP that the Quality of Resources in a
business and the Quantity of Resoures in a business tend to be equally
important, and for some companies are more important than the past record in
making reasonably accurate forecasts of future flows. This is simply giving
recognition to Returns on Equity ("ROE") and Returns on Assets ("ROA") as part
of the forecasting process with E-Equity and A-Assets being balance sheet items.
In GADCP, though, there is strong recognition given to the fact that most
forecasts, no matter what techniques are used to make them, are going to prove
to have been inaccurate. It is just too difficult to properly put into forecasts
factors such as competitive forces, technological innovations, inexperienced
managements, business cycles, access to capital markets and "acts of God."
Knowing of the inherent unreliability of its forecasts, TAVF tries to restrict
its common stock investments to issues which enjoy very high quality resources
where TAVF can acquire its interests at prices that represent a discount from
the estimated quantity of resources that exist in a business.
4
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GADCP is inherently long-term conscious. Indeed, securities markets tend to be
efficient enough that a GADCP investor such as TAVF, is unlikely to find issues
at attractive prices unless the near-term outlook is poor to clouded. For
example, TAVF would be unlikely to find the pricing attractive currently for
home builders and CRO's if these were industries where it was clear that
operating results for 2000 and 2001 were bound to be better than what was
achieved in 1998 and 1999.
Industry outlooks are as important for GADCP as they are for GARP. However,
under GADCP, industry outlooks are based on independent analysis rather than
conformity with a general consensus. The Fund concluded a few years back that
semi-conductor equipment companies would have to participate fully in the growth
of the internet and telecommunication industries simply because the internet and
telecommunications could not come close to realizing their potentials unless
there also occurred a dramatic increase in demand for increasingly sophisticated
semi-conductor chips. At that time, there was no recognition of this thesis
within any Wall Street general consensus. Third Avenue, therefore, could acquire
the common stocks of well financed semi-conductor equipment companies at prices
that were probably lower than a first stage venture capitalist would pay were
these corporations being financed as start-ups. Under a TAVF analysis, it is
assumed that Japanese non-life insurance companies ought to have a high growth
potential because these companies seem to be the only capital rich financial
institutions in a woefully capital short economy. There is, of course, no
general recognition that this thesis might have validity. Common stocks of
Japanese non-life insurance companies tend to sell at no more than 50% of net
asset value plus deferred income taxes on the unrealized appreciation of
portfolio securities. As far as Third Avenue is concerned, credit enhancement
seems to be a genuine growth industry in that financial insurance is spreading
into all types of credit instruments (it's just not municipals anymore) in a
plethora of industrial countries other than the United States. There seems to be
no general recognition that future growth prospects for financial insurers might
be at least as good as their past growth records. The common stocks of leading
financial insurers are available at discounts from adjusted book value. Further,
if bio-tech is gong to realize the dramatic growth that seems implicit in the
prices at which bio-tech common stocks are currently selling, then the CRO's,
too, will have to realize dramatic growth. More so than large pharma-companies,
bio-techs will have to farm out drug testing to CROs since most bio-techs lack
the in-house capabilities for large scale, international testing. CROcommon
stocks are selling at around 10 to 12 times earnings.
WALL STREET'S FLIGHT TO GARBAGE REVISITED
The small piece in the last Chairman's letter created quite a stir. Let me
clarify.
The gravamen of the piece was to observe that bulge bracket investment bankers
in recent years had become managing underwriters at crazy prices for the Initial
Public Offerings ("IPO's") of common stock issues of companies with little or no
revenues, no operating profits and little, or no, hope for operating profits for
the foreseeable future. Six years ago, bulge bracket underwriters would not
touch these issues. At that time, these issues were, to my knowledge, the
province of small investment banks such as DH Blair and Oscar Gruss.
The important message of the piece was that TAVF would never invest in these
IPO's, either at the initial offering price, or in the aftermarket. For example,
the Fund would have no interest in an issue that had an IPO price of 15, and
then sold in the aftermarket at 50. Rather Third Avenue might get interested
when the issue became an anti-momentum
5
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common stock, and sold at, say 2 to 5 (provided, of course, that the issue
continued to have a high quality balance sheet).
There was no intent on my part to denigrate any particular firm -- rather I
wanted to emphasize that TAVF would continue to avoid those issues that I deemed
to be vastly overpriced even though such avoidance resulted in an
underperformance by the Fund in 1998 and 1999 relative to the S&P 500 and the
NASDAQ Index. Nothing I have previously said has altered my opinion that Oscar
Gruss, Goldman Sachs, Morgan Stanley and Merrill Lynch are fine businesses led
by honorable managements with integrity. That does not mean, by any stretch of
the imagination, that TAVF has to be interested in their IPO's or their stock
market research.
The speculative excesses of recent years have, in my opinion, been of
overwhelming importance in contributing to the buoyancy of the U.S. economy. It
is hard to see how the entrepreneurial growth that has taken place would have
taken place unless start-up, and infant, ventures had access through the IPO
market to equity capital at, what for the issuers and insiders, has been super
attractive pricing. Thus, it can be argued forcefully that firms such as Oscar
Gruss, Goldman Sachs, Morgan Stanley and Merrill Lynch have made important
contributions to the general prosperity we now enjoy as do other countries where
these investment bankers have functioned, such as Oscar Gruss in Israel. So far,
investments in these common stocks also seem to have paid off for many, if not
most, OPMIs. I doubt very much though that these investments will continue to
pay off for OPMI's. I think the probabilities are that OPMI's are riding for a
fall. In any event, my loyalty as a fund manager is to the shareholders of TAVF
for whom I will continue to try to buy value rather than hype.
I shall write you again when the Semi-Annual Report for the period to end April
30, 2000 is published.
Sincerely yours,
/s/ Martin J. Whitman
Martin J. Whitman
Chairman of the Board
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS
AT JANUARY 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL % OF
AMOUNT ($) ISSUES VALUE NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BANK AND OTHER DEBT - 0.09%
Oil Services 1,133,932 Cimarron Petroleum Corp. (c) (d) $ 1,153,158 0.08%
--------------
Retail 284,760 Lechmere, Inc. Trade Claim (a) (c) 37,873
150,959 Montgomery Ward Trade Claim (a) (c) 41,212
--------------
79,085 0.01%
--------------
TOTAL BANK AND OTHER DEBT
(Cost $1,214,472) 1,232,243
--------------
- -----------------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE BONDS - 1.53%
Assisted Living 24,839,000 CareMatrix Corp. 6.25%, due 8/15/04 8,631,553 0.60%
Facilities --------------
Pharmaceutical 49,155,000 Innovative Clinical Solutions, Ltd. 6.75%, due 6/15/03 13,271,850 0.93%
Services --------------
TOTAL CONVERTIBLE BONDS
(Cost $33,174,285) 21,903,403
--------------
- -----------------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS - 0.78%
Bermuda Based Financial 7,500,000 CGA Special Account Trust (b) (c) 7,500,000 0.52%
Institutions --------------
Industrial 24,900,000 Hechinger Co. 6.95%, due 10/15/03 * 2,801,250
8,500,000 Hechinger Co. 9.45%, due 11/15/12 * 956,250
--------------
3,757,500 0.26%
--------------
TOTAL CORPORATE BONDS
(Cost $11,089,035) 11,257,500
--------------
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GOVERNMENT AGENCY BONDS - 0.36%
5,218,118 Freddie Mac, Collateralized Mortgage Obligation
Series 1675 E, 5.85%, due 9/15/17 5,192,132 0.36%
--------------
TOTAL GOVERNMENT AGENCY BONDS
(Cost $5,195,289) 5,192,132
--------------
</TABLE>
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS
AT JANUARY 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
% OF
SHARES ISSUES VALUE NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C>
COMMON STOCKS AND WARRANTS - 87.43%
Annuities & Mutual Fund 163,300 John Nuveen & Co., Inc. Class A $ 5,797,150
Management & Sales 518,600 Liberty Financial Companies, Inc. 10,825,775
--------------
16,622,925 1.16%
--------------
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) 784,725
210,917 LaSalle Re Holdings, Ltd. 2,715,556
1,064,516 St. George Holdings, Ltd. Class A (a) (b) (c) 106,451
9,044 St. George Holdings, Ltd. Class B (a) (b) (c) 905
--------------
3,608,557 0.25%
--------------
Business Development 72,445 Capital Southwest Corp. 4,201,810 0.29%
Companies --------------
Computerized Trading 223,600 Investment Technology Group, Inc. 7,937,800 0.55%
--------------
Computers, Networks 100,000 3Com Corp. (a) 5,075,000 0.35%
& Software --------------
Depository Institutions 53,000 Astoria Financial Corp. 1,543,625
218,500 Carver Bancorp, Inc. (b) 2,703,938
39,500 CNY Financial Corp. 711,000
61,543 Commercial Federal Corp. 892,373
197,307 Golden State Bancorp., Inc. (a) 2,786,961
53,480 Golden State Bancorp., Inc. Warrants, 9/17/00 (a) 207,235
197,307 Golden State Bancorp, Inc. Litigation Tracking 197,307
Warrants (a)
69,566 Peoples Heritage Financial Group, Inc. 1,021,751
41,100 Tompkins Trustco, Inc. 1,140,525
92,300 Woronoco Bancorp 888,388
--------------
12,093,103 0.84%
--------------
</TABLE>
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS
AT JANUARY 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
% OF
SHARES ISSUES VALUE NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONTINUED)
Financial Insurance 200,000 Ambac Financial Group, Inc. $ 9,787,500
608,500 Enhance Financial Services Group, Inc. 8,480,969
1,134,000 Financial Security Assurance Holdings, Ltd. 62,582,625
394,673 MBIA Inc. 19,758,317
--------------
100,609,411 7.03%
--------------
Food Manufacturers 328,000 J & J Snack Foods Corp. (a) 6,273,000
& Purveyors 109,100 Weis Markets, Inc. 4,684,481
--------------
10,957,481 0.77%
--------------
Home Building 33,000 D.R. Horton, Inc. 381,563 0.03%
--------------
Industrial Equipment 398,900 Alamo Group, Inc. 4,362,969
123,900 Cummins Engine Co., Inc. 4,739,175
125,400 Tecumseh Products Co. Class A (b) 5,721,375
435,000 Tecumseh Products Co. Class B (b) 18,270,000
--------------
33,093,519 2.31%
--------------
Industrial - Japan 2,200,000 Toyoda Automatic Loom Works, Ltd. 44,280,855 3.09%
--------------
Insurance Holding 87,035 ACE Ltd. 1,539,432
Companies 200,678 ACMAT Corp. Class A (a) (b) 2,621,356
803,669 Danielson Holding Corp. (a) (b) (c) 4,219,262
432,300 Risk Capital Holdings, Inc. (a) 6,322,387
5,490 Sen-Tech International Holdings, Inc. (a) (c) 3,294,000
50,000 White Mountains Insurance Group Inc. 5,625,000
--------------
23,621,437 1.65%
--------------
Manufactured Housing 89,000 Liberty Homes, Inc. Class A 642,469
40,000 Liberty Homes, Inc. Class B 288,750
--------------
931,219 0.07%
--------------
Medical Supplies 145,500 Analogic Corp. 5,238,000
& Services 342,300 Datascope Corp. (a) 12,365,587
554,950 Prime Medical Services, Inc. (a) 4,231,494
788,900 Protocol Systems, Inc. (a) (b) 7,445,244
90,750 St. Jude Medical, Inc. (a) 2,251,734
--------------
31,532,059 2.20%
--------------
</TABLE>
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS
AT JANUARY 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
% OF
SHARES ISSUES VALUE NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONTINUED)
Natural Resources & 1,160,000 Alexander & Baldwin, Inc. $ 23,417,500
Real Estate 179,600 Catellus Development Corp. (a) 2,245,000
31,000 Consolidated-Tomoka Land Co. 364,250
550,000 Forest City Enterprises, Inc. Class A 14,334,375
7,500 Forest City Enterprises, Inc. Class B 227,812
473,489 HomeFed Corp. (a) 255,684
955,000 Imperial Credit Commercial Mortgage Investment Corp. 10,743,750
1,180,336 Koger Equity, Inc. 18,590,292
14,600 LNR Property Corp. 273,750
846 Public Storage, Inc. 19,194
238,200 St. Joe Co. 5,642,363
3,045,508 Tejon Ranch Co. (b) (c) 69,094,963
--------------
145,208,933 10.14%
--------------
Non-Life Insurance-Japan 7,319,000 Mitsui Marine & Fire Insurance Co., Ltd. 37,510,600
6,520,000 The Chiyoda Fire & Marine Insurance Co., Ltd. 18,226,716
379,000 The Nissan Fire & Marine Insurance Co., Ltd. 1,257,271
3,246,000 The Sumitomo Marine & Fire Insurance Co., Ltd. (a) 18,148,441
1,020,800 The Tokio Marine & Fire Insurance Co., Ltd.,
Sponsored ADR 53,655,800
3,000,000 The Yasuda Fire & Marine Insurance Co., Ltd. 16,297,815
--------------
145,096,643 10.13%
--------------
Oil Services 500,000 Nabors Industries, Inc. (a) 14,812,500 1.03%
--------------
Paper & Related 126,605,679 Repap Enterprises Inc. (a) (b) 8,862,398 0.62%
Products --------------
Pharmaceutical Services 347,000 Kendle International Inc. (a) 4,012,187
475,900 PAREXEL International Corp. (a) 6,305,675
400,000 Pharmaceutical Product Development, Inc. (a) 5,100,000
--------------
15,417,862 1.08%
--------------
</TABLE>
10
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS
AT JANUARY 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
% OF
SHARES ISSUES VALUE NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONTINUED)
Security Brokers, 223,600 Jefferies Group, Inc. $ 4,933,175
Dealers & 893,332 Legg Mason, Inc. 32,941,617
Flotation Companies 1,086,250 Raymond James Financial, Inc. 20,638,750
--------------
58,513,542 4.09%
--------------
Semiconductor 100,000 Applied Materials, Inc. (a) 13,725,000
Equipment Manufacturers 1,700,000 AVX Corp. 101,150,000
and Related 1,004,500 C.P. Clare Corp. (a) (b) 8,914,937
1,500,000 Electro Scientific Industries, Inc. (a) (b) 120,187,500
1,882,500 Electroglas, Inc. (a) (b) 55,416,094
2,320,900 FSI International, Inc. (a) (b) 35,973,950
400,000 GaSonics International Corp. (a) 11,975,000
200,000 KLA-Tencor Corp. (a) 11,725,000
300,000 Photronics, Inc. (a) 8,981,250
3,734,500 Silicon Valley Group, Inc. (a) (b) 77,724,281
663,200 Veeco Instruments, Inc. (a) 36,393,100
--------------
482,166,112 33.67%
--------------
Small-Cap Technology 230,000 Evans & Sutherland Computer Corp. (a) 2,645,000
424,000 Hypercom Corp. (a) 6,148,000
154,800 Integrated Systems, Inc. (a) 4,150,575
247,200 Planar Systems, Inc. (a) 2,703,750
306,900 Vertex Communications Corp. (a) (b) 6,464,081
--------------
22,111,406 1.54%
--------------
Title Insurance 3,145,000 First American Financial Corp. 37,346,875
1,951,400 Stewart Information Services Corp. (b) 25,734,087
--------------
63,080,962 4.41%
--------------
TOTAL COMMON STOCKS AND WARRANTS
(Cost $795,849,619) 1,252,017,097
--------------
</TABLE>
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THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS
AT JANUARY 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
% OF
SHARES ISSUES VALUE NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PREFERRED STOCK - 1.54%
Bermuda Based 601,554 CGA Group, Ltd., Series A (b) (c) $ 15,038,851
Financial Institutions 6,045,667 CGA Group, Ltd., Series C (b) (c) 7,039,176
--------------
22,078,027 1.54%
--------------
Insurance Companies 4,775 Ecclesiastical Insurance, 8.625% 8,443 0.00%
--------------
TOTAL PREFERRED STOCK
(Cost $19,864,204) 22,086,470
--------------
INVESTMENT
AMOUNT
- -----------------------------------------------------------------------------------------------------------------------------------
LIMITED PARTNERSHIPS - 1.42%
Bermuda Based $2,215,000 ESG Partners, LP (c) 728,358 0.05%
--------------
Financial Institutions
Financial Insurance $15,000,000 American Capital Access Holdings, LLC (c) 15,000,000
$ 950,000 Insurance Partners II Equity Fund, LP (c) 950,000
--------------
15,950,000 1.11%
--------------
Insurance Holding $3,667,341 Head Insurance Investors LP (c) 3,667,341 0.26%
Companies --------------
TOTAL LIMITED PARTNERSHIPS
(Cost $21,887,756) 20,345,699
--------------
NOTIONAL
PRINCIPAL
- -----------------------------------------------------------------------------------------------------------------------------------
OTHER INVESTMENTS - 0.04%
Foreign Currency $90,000,000 Bear Stearns Currency Swap,
Swap Contracts Termination Date 4/22/00 (c) (e) 1,202,291
$50,000,000 Bear Stearns Currency Swap,
Termination Date10/27/00 (c) (f) (673,470)
--------------
528,821 0.04%
--------------
TOTAL OTHER INVESTMENTS
(Cost $0) 528,821
--------------
</TABLE>
12
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[GRAPHIC OMITTED]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS
AT JANUARY 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL % OF
AMOUNT ($) ISSUES VALUE NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHORT TERM INVESTMENTS - 6.09%
Repurchase Agreements 83,558,780 Bear Stearns 5.72%, due date February 1, 2000 (g) $ 83,558,780 5.84%
--------------
U.S. Treasury Bills 2,500,000 U.S. Treasury Bill 5.00%+, 02/03/00 2,499,316
1,200,000 U.S. Treasury Bill 5.88%+, 12/07/00 (h) 1,138,982
--------------
3,638,298 0.25%
--------------
TOTAL SHORT TERM INVESTMENTS
(Cost $87,201,349) 87,197,078
--------------
TOTAL INVESTMENT PORTFOLIO - 99.28%
(Cost $975,476,009) 1,421,760,443
--------------
OTHER ASSETS
LESS LIABILITIES - 0.72% 10,248,232
--------------
NET ASSETS - 100.00% $1,432,008,675
(Applicable to 38,460,778 ==============
shares outstanding)
NET ASSET VALUE PER SHARE $37.23
======
</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 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) Repurchase agreement collateralized by:
U.S. Treasury Strips, par value $14,000,000, 6.80% matures 11/15/08: market
value $7,761,320.
U.S. Treasury Strips, par value $7,160,000, 6.66% matures 5/15/14: market
value $2,770,061.
U.S. Treasury Strips, par value $50,000,000, 8.50%, matures 2/15/20: market
value $13,406,500.
U.S. Treasury Strips, par value $50,000,000, 8.75%, matures 8/15/20: market
value $13,328,000.
U.S. Treasury Strips, par value $13,337,000, 8.125%, matures 5/15/21: market
value $3,305,042.
U.S. Treasury Strips, par value $14,635,000, 8.125% matures 5/15/21: market
value $3,713,631.
U.S. Treasury Strips, par value $29,450,000, 6.42% matures 2/15/22: market
value $7,104,812.
U.S. Treasury Strips, par value $93,320,000, 6.00% matures 2/15/26: market
value $17,993,029.
U.S. Treasury Strips, par value $86,100,000, 6.50%, matures 11/15/26: market
value $15,847,566.
(h) Security segregated for future Fund commitments.
* Issuer in default.
+ Annualized yield at date of purchase.
ADR: American Depository Receipt.
13
<PAGE>
[GRAPHIC OMITTED]
THIRD AVENUE SMALL-CAP VALUE FUND
Dear Fellow Shareholders:
At January 31, 2000, the end of the first fiscal quarter, the unaudited net
asset value attributable to the 10,231,029 common shares outstanding of Third
Avenue Small-Cap Value Fund ("Small-Cap Value" or the "Fund") was $12.20 per
share, compared with the Fund's net asset value of $11.23 per share at October
31, 1999, and a net asset value at January 31, 1999 of $11.81 per share, both as
adjusted for a subsequent distribution to stockholders. At February 23, 2000,
the net asset value was $12.80 per share.
QUARTERLY ACTIVITY
During the quarter, Small-Cap Value established new positions in four companies,
added to seven of its 34 existing positions, and reduced its holdings in nine
companies. At January 31, 2000, Small-Cap Value held positions in 38 companies,
the top 10 positions of which accounted for approximately 44% of the Fund's net
assets.
NUMBER OF SHARES NEW POSITIONS ACQUIRED
24,300 Century Aluminum Co. Common Stock ("Century Common")
76,400 Kendle International Inc. Common Stock ("Kendle Common")
28,000 PAREXEL International Corp. Common Stock ("PAREXEL Common")
93,000 Pharmaceutical Product Development, Inc. Common Stock
("PPD Common")
INCREASES IN EXISTING POSITIONS
19,000 Alamo Group, Inc. Common Stock ("Alamo Common")
70,700 Bel Fuse, Inc. Class B Common Stock ("Bel Fuse B Common")
5,200 Evans & Sutherland Computer Corp. Common Stock
("E&S Common")
10,700 Financial Security Assurance Holdings Ltd. Common Stock
("FSA Common")
5,000 First American Financial Corp. Common Stock
("First American Common")
15,000 LaSalle Re Holdings, Ltd. Common Stock ("LaSalle Common")
6,000 MBIA Inc. Common Stock ("MBIA Common")
REDUCTIONS IN EXISTING POSITIONS
44,100 Alico, Inc. Common Stock ("Alico Common")
21,000 Avatar Holdings, Inc. Common Stock ("Avatar Common")
78,600 Centigram Communications Corp. Common Stock
("Centigram Common")
35,200 C.P. Clare Corp. Common Stock ("Clare Common")
6,900 Deltic Timber Corp. Common Stock ("Deltic Common")
14
<PAGE>
[GRAPHIC OMITTED]
NUMBER OF SHARES REDUCTIONS IN EXISTING POSITIONS (CONTINUED)
400,000 The Nissan Fire & Marine Insurance Co., Ltd. Common Stock
("Nissan Common")
114,600 Sawako Corp., Sponsored ADR ("Sawako ADRs")
24,000 SpeedFam-IPEC, Inc. Common Stock ("SpeedFam Common")
14,700 ValueVision International, Inc. Class A Common Stock
("ValueVision Common")
Though relatively small in size, the new additions to the portfolio hold
tremendous promise. Kendle, PAREXEL and PPD Common each represent a way to
participate, at attractive prices, in the longer-term growth of the
pharmaceutical industry. Increases in existing positions are largely extensions
of the buying programs from the prior quarter. Reductions of existing positions
related primarily to cash raising exercises in order to meet shareholder
redemptions. While disappointing, the redemptions have slowed significantly from
the prior quarter. Moreover, the portfolio will generate new cash subsequent to
the end of the quarter, owing to recent M&A activity. Cash proceeds from at
least two takeovers should help mitigate the need for involuntary sales of
existing holdings.
Though the public markets have not recognized the value in some of our holdings,
it seems the private markets have, and the trend seems to be accelerating. At
the end of last year, Capital Re was acquired by ACE Limited. This year, three
existing holdings, Gleason Corporation, LaSalle Re, and Protocol each announced
that the companies were in takeover or merger talks. Subsequent to the end of
the Fund's fiscal quarter, a fourth holding, SpecTran Corporation, was acquired
by Lucent Technologies. A fifth holding, C.P. Clare, has dissident shareholders
pressuring the company to improve shareholder value.
Gleason Corporation announced that its management team would lead a cash buyout
at a significant premium to the Fund's cost basis. LaSalle Re agreed to merge
with Trenwick Group in a stock swap creating a larger, stronger organization.
Protocol Systems became the target of an unsolicited bid by Invivo Corporation,
and may well be "in play." The acquisition of SpecTran by Lucent Technologies,
discussed in more detail below, was completed February 2, 2000.
At the time Small-Cap Value acquired its initial position in SpecTran
Corporation common stock ("SpecTran Common") more than two years ago, the
markets for optical fiber, cable and related components were clouded by a host
of capacity issues within the industry, depressing the stock prices of many of
the companies within the industry. What was clear, however, was that the
longer-term demand for optical fiber and related components was likely to
explode, as the build-out of various telecommunications networks required more
fiber optic materials. With its newly constructed single mode and multi mode
fiber capacity, SpecTran appeared to be one of the few interesting ways of
participating in the growing demand for fiber optics.
Two years later, our theory proved correct. Demand for fiber optics has
exploded, and equity multiples of companies with fiber optic anything have
careened off the charts. Unfortunately for SpecTran shareholders, Lucent
announced a cash tender offer for all of SpecTran's shares during July 1999, all
but pre-empting the majority of SpecTran's value for itself. Adding insult to
injury, and in stark contrast to the vast majority of tender offers, Lucent's
bid, at $9 per share, came at a 22% DISCOUNT to the prior day's closing price of
SpecTran's stock. That it took Lucent so long to
15
<PAGE>
[GRAPHIC OMITTED]
close what should have been a quick deal testifies, at least in part, to the
resistance of the deal from a high percentage of SpecTran shareholders. Lucent
appears to have gained a terrific asset at rock bottom prices.
The financial projections below were supplied to Lucent and other bidders by
SpecTran management during due diligence studies and were made public in filings
with the SEC. Even modest multiples on these figures - never mind the ludicrous
multiples paid by the public markets today - suggest a much higher value for
SpecTran Common than the $9 per share, or $64 million, Lucent paid.
SPECTRAN CORPORATION FINANCIAL PROJECTIONS
($ MILLIONS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
1997 1998 1999 2000 2001 2002
- --------------------------------------------------------------------------------
Sales $62.1 $70.9 $95.9 $110.1 $125.4 $148.7
EBIT $ 6.0 ($ 0.4) $ 9.3 $ 11.0 $ 15.1 $ 24.9
Cash from Operations na na $ 6.2 $ 11.7 $ 15.6 $ 20.9
EPS $0.67 $0.09 $0.52 $ 0.64 $ 0.97 $ 1.82
- --------------------------------------------------------------------------------
Source: SpecTran Corp., SEC filing DEFM14C.
Ironically, the day after Lucent completed its acquisition of SpecTran, Corning
Inc., the world's largest maker of fiber optic lines, announced its intentions
to spend $750 million to expand its fiber-making capacity. Subsequent to
Corning's announcement, Lucent announced its acquisition of Ortel Corporation, a
maker of fiber optic components, for $3 billion.
While it's disappointing that the Fund did not realize the full value in
SpecTran Common, it's gratifying that values are now getting recognized in many
of our other positions by the private markets. One of the virtues of value
investing, as practiced by Third Avenue, is that it does not rely on the public
markets for an exit. Regardless of general market conditions, Third Avenue
shareholders can benefit as either the private markets or public markets
recognize the values in our holdings.
I look forward to writing you again when we publish our Semi-Annual Report dated
April 30, 2000.
Sincerely,
/s/Curtis R. Jensen
Curtis R. Jensen
Co-manager, Third Avenue Small-Cap Value Fund
16
<PAGE>
[GRAPHIC OMITTED]
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
PORTFOLIO OF INVESTMENTS
AT JANUARY 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
% OF
SHARES ISSUES VALUE NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS - 98.99%
Bermuda Based Financial 134,000 LaSalle Re Holdings, Ltd. $ 1,725,250 1.38%
--------------
Institutions
Construction-Japan 317,300 Sawako Corp., Sponsored ADR 1,715,403 1.37%
--------------
Financial Insurance 71,000 Financial Security Assurance Holdings Ltd. 3,918,312
124,822 MBIA Inc. 6,248,901
--------------
10,167,213 8.15%
--------------
Industrial Equipment 310,000 Alamo Group, Inc. 3,390,625
161,600 Gleason Corp. 3,696,600
--------------
7,087,225 5.68%
--------------
Life Insurance 179,000 FBL Financial Group, Inc. Class A 2,327,000 1.86%
--------------
Manufactured Housing 184,300 Skyline Corp. 3,801,187 3.05%
--------------
Media 125,000 ValueVision International, Inc. Class A (a) 4,445,313 3.56%
--------------
Medical Supplies 278,000 Protocol Systems, Inc. (a) 2,623,625 2.10%
--------------
& Services
Metal & Metal Products 24,300 Century Aluminum Co. 328,050 0.26%
--------------
Natural Resources & 187,500 Alexander & Baldwin, Inc. 3,785,156
Real Estate 197,300 Alico, Inc. (b) 3,082,813
139,000 Avatar Holdings, Inc. (a) (b) 2,363,000
126,900 Cabot Industrial Trust 2,474,550
227,400 Deltic Timber Corp. (b) 5,116,500
206,000 Koger Equity, Inc. 3,244,500
200,000 Tejon Ranch Co. (d) 4,537,500
1,104,700 The TimberWest Forest Corp. (Canada) 7,343,360
--------------
31,947,379 25.60%
--------------
Non-Life 2,025,000 The Nissan Fire & Marine
Insurance-Japan Insurance Co., Ltd. 6,717,607 5.38%
--------------
Paper & Related 13,000,000 Repap Enterprises Inc. (a) 910,000 0.73%
Products --------------
</TABLE>
17
<PAGE>
[GRAPHIC OMITTED]
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JANUARY 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
% OF
SHARES ISSUES VALUE NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS (CONTINUED)
Pharmaceutical Services 76,400 Kendle International Inc. (a) $ 883,375
28,000 PAREXEL International Corp. (a) 371,000
93,000 Pharmaceutical Product Development, Inc. (a) 1,185,750
--------------
2,440,125 1.96%
--------------
Retail 426,100 HomeBase, Inc. (a) (b) 1,358,194
261,700 Value City Department Stores, Inc. (a) 4,007,281
--------------
5,365,475 4.30%
--------------
Semiconductor 484,800 C.P. Clare Corp. (a) (c) 4,302,600
Equipment Manufacturers 154,500 Electroglas, Inc. (a) 4,548,094
and Related 417,400 FSI International, Inc. (a) 6,469,700
99,000 Silicon Valley Group, Inc. (a) 2,060,438
175,000 SpeedFam-IPEC, Inc. (a) 2,635,937
--------------
20,016,769 16.04%
--------------
Technology 295,800 ACT Networks, Inc. (a) 2,218,500
25,000 Bel Fuse, Inc. Class A (a) 634,375
111,400 Bel Fuse, Inc. Class B (a) 2,339,400
248,300 Centigram Communications Corp. (a) (c) 3,817,613
203,500 Evans & Sutherland Computer Corp. (a) (b) 2,340,250
370,300 Planar Systems, Inc. (a) 4,050,156
490,600 SpecTran Corp. (a) (c) 4,400,069
--------------
19,800,363 15.86%
--------------
Title Insurance 179,800 First American Financial Corp. 2,135,125 1.71%
--------------
TOTAL COMMON STOCKS
(Cost $124,315,533) 123,553,109
--------------
</TABLE>
18
<PAGE>
[GRAPHIC OMITTED]
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JANUARY 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
NOTIONAL % OF
PRINCIPAL ISSUES VALUE NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OTHER INVESTMENTS - 0.00%
Foreign Option Contracts $6,500,000 Japanese Yen February 2000 Put Options (d) (e) $ 975 0.00%
--------------
TOTAL OTHER INVESTMENTS
(Cost $217,750) 975
--------------
PRINCIPAL
AMOUNT ($)
- -----------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS - 2.92%
Repurchase Agreements 163,384 Bear Stearns 5.72%, due date February 1, 2000 (f) 163,384 0.13%
--------------
Repurchase Agreements - 4,762 Bear Stearns 2.94%, due date February 1, 2000 (g) 4,762
Collateral on 3,474,000 Bear Stearns 6.10%, due date February 1, 2000 (g) 3,474,000
Securities Loaned --------------
3,478,762 2.79%
--------------
TOTAL SHORT TERM INVESTMENTS
(Cost $3,642,146) 3,642,146
--------------
TOTAL INVESTMENT PORTFOLIO - 101.91%
(Cost $128,175,429) 127,196,230
--------------
OTHER ASSETS
AND LIABILITIES - (1.91%) (2,387,263)
--------------
NET ASSETS - 100.00% $ 124,808,967
(Applicable to 10,231,029 ==============
shares outstanding)
NET ASSET VALUE PER SHARE $12.20
======
</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
$295,000, 11.25%, matures 8/15/08 : market value $166,675.
(g) Repurchase agreement collateralized by:
U.S. Treasury Strips, par value $20,000, 8.125%, matures 5/15/21 : market
value $4,956.
U.S. Treasury Strips, par value $14,300,000, 8.125%, matures 5/15/21 :
market value $3,543,683.
ADR: American Depository Receipt.
19
<PAGE>
[GRAPHIC OMITTED]
THIRD AVENUE REAL ESTATE VALUE FUND
Dear Fellow Shareholders:
At January 31, 2000, the end of the first fiscal quarter of 2000, the unaudited
net asset value attributable to the 1,042,495 shares outstanding of the Third
Avenue Real Estate Value Fund (the "Fund") was $10.85 per share. This compares
with a net asset value of $10.78 per share at October 31, 1999, and a net asset
value of $10.51 per share at January 31, 1999, both as adjusted for subsequent
distributions to shareholders of $.311 per share. At February 23, 2000, the
unaudited net assets totaled $11,565,266, attributable to the 1,060,355 common
shares outstanding with a net asset value of $10.91 per share.
QUARTERLY ACTIVITY
During the first quarter of fiscal 2000, the Fund established new positions in
the common stocks of three companies and in the subordinated notes of one
company. The Fund increased its position in the common stocks of 12 companies
and reduced its position in the common stock of one company. At January 31,
2000, the Fund held positions in 24 companies, and was approximately 94.2%
invested. The Fund's top 10 positions accounted for approximately 59.5% of the
Fund's net assets.
PRINCIPAL AMOUNT
OR
NUMBER OF SHARES NEW POSITIONS ACQUIRED
$500,000 CareMatrix Corp. 6.25% Convertible Subordinated Notes due
8/15/04 ("CareMatrix Notes")
20,000 shares D.R. Horton, Inc. ("Horton Common")
2,800 shares ElderTrust ("ElderTrust Common")
14,700 shares U.S. Home Corp. ("U.S. Home Common")
NUMBER OF SHARES INCREASES IN EXISTING POSITIONS
20,500 Anthracite Capital, Inc. ("Anthracite Common")
37,500 AMRESCO Capital Trust Inc. ("AMRESCO Common")
19,400 Avatar Holdings, Inc. ("Avatar Common")
4,600 Catellus Development Corp. ("Catellus Common")
21,900 Commercial Assets, Inc. ("Commercial Common")
1,000 Consolidated-Tomoka Land Co. ("Consolidated Common")
20
<PAGE>
[GRAPHIC OMITTED]
NUMBER OF SHARES INCREASES IN EXISTING POSITIONS (CONTINUED)
5,000 Deltic Timber Corp. ("Deltic Common")
13,500 LNR Property Corp. ("LNR Common")
31,600 Prime Group Realty Trust ("Prime Common")
7,000 St. Joe Co. ("St. Joe Common")
32,000 United Investors Realty Trust ("United Common")
15,300 Wellsford Real Properties, Inc. ("Wellsford Common")
REDUCTIONS IN EXISTING POSITIONS
400 Echelon International Corp., Inc. ("Echelon Common")
OVERVIEW OF NEW POSITIONS ESTABLISHED DURING THE QUARTER:
HOMEBUILDING INDUSTRY
For the last 18 months, the stock market has been pricing homebuilding common
stocks at levels that reflect an anticipated severe downturn in the industry.
Since November 1998, 30-year mortgage rates have increased by about 150 basis
points and short-term rates (bank prime rate) have increased by about 100 basis
points. However, homebuyers have shrugged off the rate increases, new home sales
continue to set records, and homebuilders continue to report record earnings.
Despite efforts by the Federal Reserve to slow down the economy by raising
interest rates, employment, inflation, and housing affordability continue to be
favorable for the homebuilding industry. We anticipate that homebuilding
activity will ultimately slow down, especially if interest rates continue
rising. Even if interest rates remain stable, it is unlikely that the industry
can maintain such strong results indefinitely (1998 and 1999 were record years).
Economists are predicting a housing slowdown in 2000 and 2001, but most
homebuilders are reporting record backlogs (homes sold but not yet closed), and
2000 is looking like another strong year. Of course, it is possible that if
mortgage rate increases make housing less affordable, homebuilders will face
higher cancellation rates, resulting in fewer closings.
Third Avenue Funds' investment strategy includes buying common stocks of
companies in industries where the near-term outlook is negative, provided the
common stock is safe and cheap. The homebuilding industry certainly qualifies as
an industry with near-term negative prospects. But at current prices, most
homebuilder common stocks appear to be extremely cheap based upon price/earnings
and price/book ratios. We believe that if the industry does slow down or the
economy goes into a recession, the strongly capitalized and most geographically
diverse homebuilders will be able to ride out the cycle and increase market
share from smaller and/or weaker companies. We evaluate common stocks of
companies in cyclical industries (like homebuilding or title insurance) by
analyzing the average annual earn-
21
<PAGE>
[GRAPHIC OMITTED]
ings over the most recent cycle, trying to make reasonable qualitative judgments
about the cycle, and then calculating the current price/earnings ratio based on
the average earnings. We assume that if a company is well financed, it won't get
into trouble during the down cycle, and average earnings over the next cycle
will likely be greater than the last one.
D.R. HORTON is the second largest and one of the most geographically diversified
homebuilders in the United States, with operating divisions in 23 states and 40
markets located in the Mid-Atlantic, Midwest, Southeast, Southwest and West. The
company sells its homes primarily to first-time and move-up homebuyers. The
company also provides mortgage financing and TITLE SERVICES FOR HOMEBUYERS. IN
DECEMBER 1999, PROFESSIONAL BUILDER magazine selected D.R. Horton as the 1999
"Builder of the Year". The company has a very strong balance sheet (debt to
total assets equals about 50%) and a 22-year track record of increased revenues
and earnings. The company continues to report record sales, closings, backlogs
and earnings, and Horton Common has been trading at an all-time-low PE ratio of
about 4.5x on trailing earnings, and at a 10% discount to book value. Since
1994, Horton Common has traded at an average PE ratio of 12.4x (with a high of
25.5x) and an average price/book ratio of 2.2x (with a high of 4.4x). We have
been buying Horton Common at about 8.5 times the company's average earnings of
$1.36 per share over the last five years. We expect that the company will earn
substantially more than $1.36 per share on average over the next five years. If
we are right, Horton Common should be a homerun. If we are wrong, we still could
earn a reasonable return.
U.S. HOME is the nation's seventh largest homebuilder based on 1999 home
deliveries. The company has communities in 33 metropolitan areas in 13 states.
The company's products range from lower-end affordable homes to custom move-up
homes. The company is also a leading developer of retirement/active adult and
intergenerational communities. Additionally, the company provides
mortgage-financing services for its homebuyers. Like D.R. Horton, U.S. Home has
a very strong balance sheet (debt to total assets equals about 50%) and it is
geographically diversified. One of the company's primary goals over the last few
years has been to expand its retirement/active adult segment to 33% of total
activity. Historically, margins on this product type have been substantially
higher than on conventional housing. This transition necessitated larger capital
outlays to acquire (including option payments), process for approvals, and
develop larger tracts of land than is normally required for conventional
housing. Approximately 48% of the company's total lots owned or under option are
related to retirement/active adult operations. The company's land strategy has
resulted in lower returns on assets and equity relative to its peers. The stock
market has penalized U.S. Home Common as illustrated by a five-year average PE
ratio of 8.1x and price/book ratio of 87%. At the current trading levels, we
have purchased U.S. Home Common at about a 6.7x PE ratio on five-year average
earnings and at 61% of book value. We like the company's long-term strategy and
believe management has positioned the company to take advantage of the strong
demand for retirement/active adult communities. Subsequent to the end of our
fiscal quarter, U.S. Home entered into a merger agreement to be acquired. See
"Resource Conversion Update" below.
LONG-TERM HEALTHCARE (ASSISTED-LIVING) INDUSTRY
The Fund made investments in the securities of two companies involved in the
ownership and/or operation of assisted living facilities ("ALFs"). During the
past five years, the assisted living industry has been one of the fastest
growing niche markets in the United States. ALFs have become a preferred
alternative for senior citizens who do not require the intensive medical
attention provided by a skilled nursing facility ("SNF"), but cannot live
independently due to physical and/or cognitive frailties. The assisted living
industry has grown due to: (i) increased emphasis by both fed-
22
<PAGE>
[GRAPHIC OMITTED]
eral and state governments on containment of long-term healthcare costs; (ii)
limitations imposed in many states on construction of additional SNFs; and (iii)
the relative affluence of the elderly segment of the population.
Unfortunately, as is often the case, the industry grew too fast. During the REIT
boom of the mid-1990s, the capital markets embraced the industry and equity
capital flowed freely to support the rapid development phase. Much of the
development was financed by REITs that, fortunately, no longer have access to
equity capital. Competition has caused fill-up rates to slow down, resulting in
lower-than-expected returns. Despite the industry experiencing some
overbuilding, mismanagement, and overly complex accounting, the ALF basic
operating model appears to be sound. However, the near-term outlook for the
industry appears uncertain. Several high-profile SNF operators have filed
bankruptcy as a result of changes to Medicare reimbursement programs, and many
REITs that own and lease ALFs also own and lease SNFs to some of these troubled
operators. We expect there will be substantial consolidation of ALF operators as
well as several bankruptcies.
CAREMATRIX CORP. operates approximately 61 ALFs in 18 states, of which 32 are
owned or leased and 29 are managed. CareMatrix's business is closely tied to a
privately held related entity, Chancellor Group ("Chancellor"), which is
responsible for obtaining all of the financing to develop and build ALFs.
CareMatrix earns development fees from Chancellor for coordinating the
activities related to the properties during the development and construction
phase. Once construction is completed, CareMatrix assumes all management
responsibilities pursuant to a 10-year management contract and earns a
management fee from Chancellor. During the development, construction and
management phase, Chancellor (and not CareMatrix) assumes all risks of
construction and operations. CareMatrix has the option to convert the management
agreement into a "fair-market-value" lease, generally for a 15-year term plus
options. CareMatrix usually exercises its option when the facility reaches
profitability. During 1999, Chancellor began having problems obtaining financing
for new ALFs which were in the development phase. Additionally, we presume that
Chancellor got into a cash crisis due to (i) insufficient financing for projects
under construction and (ii) negative cash flow on completed projects as a result
of competition and slower fill-up. Consequently, we estimate that CareMatrix has
not collected approximately $60 million of development and management fees from
Chancellor, leaving the company in a precarious financial position even though
the company's owned and leased properties appear to be operating profitably. The
Fund has purchased CareMatrix Notes at a discount to face value, which should
result in a yield to maturity of approximately 36% assuming no default. We
believe, however, that there is a high likelihood that CareMatrix and/or
Chancellor will file Chapter 11. We figure that in the event CareMatrix
reorganizes pursuant to a Chapter 11 plan, the holders of CareMatrix Notes will
own nearly all of the reorganized company's equity. I should note here that the
Third Avenue Value Fund ("TAVF") has also purchased CareMatrix Notes in
sufficient quantity such that it will have significant input in any plan of
reorganization. Without TAVF's involvement in CareMatrix Notes, it is safe to
assume that Third Avenue Real Estate Value Fund, with its limited resources,
would not be a player.
ELDERTRUST is a healthcare REIT that owns interests in 15 ALFs, eight SNFs, six
medical office buildings and one independent living facility. The Fund made an
initial investment in ElderTrust Common during the quarter. Subsequent to
quarter-end, we determined that the risks related to the company's largest
tenant/operator were significantly higher than originally estimated. As a
result, the Fund recently sold its position in ElderTrust Common (at a small
profit).
23
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RESOURCE CONVERSION UPDATE
Due to the nature of our portfolios at Third Avenue Funds, resource conversion
activities will more often than not be the catalyst that closes the gap between
the price we pay for securities and their intrinsic value. Resource conversions
include mergers, management buyouts, tender offers, major share buybacks,
hostile takeovers and leveraged buyouts, among others. Fortunately, as value
investors, we often do not have to rely on the public markets. We can realize
capital appreciation as a result of private market transactions or by the public
markets ultimately recognizing intrinsic value. One of the benefits of buying at
a discount to net asset value is the creation of multiple exit strategies that
would not be available if we "paid up" for securities. The Fund holds positions
in 24 companies, of which nearly half are currently involved in material
resource conversion activities. These include:
AVATAR HOLDINGS - Sold its Florida water and wastewater utilities assets and
some non-core real estate assets. The company has recently announced board
approval for a $20 million buyback of common shares and convertible notes. The
company has approximately $150 million in cash as a result of asset sales, and
we expect that additional buybacks will be initiated.
ECHELON INTERNATIONAL - Recently announced a tender offer for 100% of the
outstanding common shares at $34 per share. The Fund's average cost for Echelon
Common is approximately $22.50 per share.
ST. JOE COMPANY - Sold its sugar business and farming rights and announced its
intent to sell 800,000 acres of timberlands. The company also announced its plan
to spin-off to St. Joe shareholders its 54% interest in Florida East Coast
Industries, a publicly-traded company that we estimate represents approximately
40% of the value of St. Joe Common at current prices. Furthermore, St. Joe has
recently repurchased over 6.5 million common shares, representing approximately
7% of the total outstanding.
SECURITY CAPITAL GROUP - Completed a $100 million buyback of common shares and
announced board approval for an additional $100 million buyback. Combined, the
buybacks will represent more than 12% of the outstanding common shares.
U.S. HOME - On February 17, 2000, announced that it has entered into a
definitive merger agreement with Lennar Corporation. The combined company will
become the largest homebuilder in the United States. Lennar will acquire U.S.
Home for approximately $36 per share in cash and stock. The Fund's average cost
for U.S. Home Common is approximately $25.30 per share.
WELLSFORD REAL PROPERTIES - Repurchased 1.45 million common shares pursuant to a
2 million-share buyback authorization. The buyback represents approximately 10%
of the outstanding common shares.
AMRESCO CAPITAL TRUST - Terminated its merger agreement with Impac Commercial
Holdings. We expect that the company will either be acquired or liquidated.
COMMERCIAL ASSETS - Entered into a stock-for-stock merger agreement with Asset
Investors Corp. We expect the merger to close during the second quarter of 2000.
24
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IMPERIAL CREDIT - Entered into an all-cash merger agreement with Imperial Credit
Industries. We expect the merger to close by the end of March 2000.
PRIME GROUP REALTY - Announced its intention to sell up to $500 million of its
real estate holdings and use half the proceeds to buyback common shares and the
balance to pay down debt. At current prices, the share buyback could represent
more than 75% of the outstanding common shares.
UNITED INVESTORS - Announced board authorization for a buyback of approximately
11% of the outstanding common shares. The buyback will be funded primarily by
property sales.
I look forward to writing to you again when we publish our Semi-Annual Report
for the period ending April 30, 2000.
Sincerely,
/s/ Michael H. Winer
Michael H. Winer
Co-manager, Third Avenue Real Estate Value Fund
25
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THIRD AVENUE TRUST
THIRD AVENUE REAL ESTATE VALUE FUND
PORTFOLIO OF INVESTMENTS
AT JANUARY 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL % OF
AMOUNT ($) ISSUES VALUE NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONVERTIBLE BONDS - 1.54%
Assisted Living 500,000 CareMatrix Corp. 6.25%, due 8/15/04 $ 173,750 1.54%
Facilities --------------
TOTAL CONVERTIBLE BONDS
(Cost $181,609) 173,750
--------------
SHARES
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS - 92.69%
Home Building 20,000 D.R. Horton, Inc. 231,250
14,700 U.S. Home Corp. (a) 351,881
--------------
583,131 5.16%
--------------
Natural Resources 11,500 Deltic Timber Corp. 258,750
4,000 The TimberWest Forest Corp. (Canada) 26,590
--------------
285,340 2.52%
--------------
Real Estate Development 47,400 Avatar Holdings, Inc. (a) 805,800
38,000 Catellus Development Corp. (a) 475,000
10,700 Consolidated-Tomoka Land Co. 125,725
17,000 Echelon International Corp., Inc. (a) 553,562
30,700 Forest City Enterprises, Inc. Class A (b) 800,119
37,500 LNR Property Corp. 703,125
28,500 St. Joe Co. 675,094
60,700 Wellsford Real Properties, Inc. (a) 508,362
--------------
4,646,787 41.08%
--------------
Real Estate Holding Company 25,500 Security Capital Group, Inc. (a) 325,125 2.87%
--------------
Real Estate Investment Trust 42,000 Aegis Realty, Inc. 357,000
64,000 AMRESCO Capital Trust Inc. 588,000
75,500 Anthracite Capital, Inc. 514,344
79,300 Commercial Assets, Inc. 381,631
2,800 ElderTrust 17,850
72,000 Imperial Credit Commercial Mortgage Investment Corp. 810,000
</TABLE>
26
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THIRD AVENUE TRUST
THIRD AVENUE REAL ESTATE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JANUARY 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
% OF
SHARES ISSUES VALUE NET ASSETS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS (CONTINUED)
22,000 Koger Equity, Inc. $ 346,500
55,800 Prime Group Realty Trust 777,712
87,000 United Investors Realty Trust 483,938
--------------
4,276,975 37.81%
--------------
Title Insurance 31,000 First American Financial Corp. 368,125 3.25%
--------------
TOTAL COMMON STOCKS
(Cost $10,478,253) 10,485,483
--------------
PRINCIPAL
AMOUNT ($)
- -----------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS - 2.84%
Repurchase Agreements - 321,300 Bear Stearns 6.10%, due date February 1, 2000 (c) 321,300 2.84%
--------------
Collateral on Securities Loaned
TOTAL SHORT TERM INVESTMENTS 321,300
--------------
(Cost $321,300)
TOTAL INVESTMENT PORTFOLIO - 97.07%
(Cost $10,981,162) 10,980,533
--------------
OTHER ASSETS
LESS LIABILITIES - 2.93% 331,433
--------------
NET ASSETS - 100.00% $ 11,311,966
(Applicable to 1,042,495 ==============
shares outstanding)
NET ASSET VALUE PER SHARE $10.85
======
</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 $1,325,000, 8.125%, matures 5/15/21:
market value $328,348.
27
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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
[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
