[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE VALUE FUND
THIRD AVENUE SMALL-CAP VALUE FUND
THIRD AVENUE REAL ESTATE VALUE FUND
THIRD QUARTER REPORT
(Unaudited)
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July 31, 2000
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Third Avenue Value Fund
Dear Fellow Shareholders:
At July 31, 2000, the unaudited net asset value attributable to the 46,023,934
common shares outstanding of the Third Avenue Value Fund ("TAVF," "Third
Avenue," or the "Fund") was $37.10 per share. This compares with an unaudited
net asset value, adjusted for a subsequent distribution to shareholders, of
$38.41 per share at April 30, 2000, and an unaudited net asset value, also
adjusted for subsequent distributions, of $29.36 per share at July 31, 1999. At
August 25, 2000, the unaudited net asset value was $39.02 per share.
QUARTERLY ACTIVITY
During the quarter, eight new positions were established, of which two were the
debt instruments of troubled companies, five were the common stocks of
well-capitalized businesses, and one was the common stock of a company spun-off
from 3Com Corp., Palm, Inc. Seventeen existing positions were increased, of
which two were debt instruments of troubled companies and fifteen were the
common stocks of well-capitalized businesses. During this interim no securities
were sold in the open market, but three common stock issues -- CNY Financial
Corp., Financial Security Assurance Holdings, and Protocol Systems -- were
eliminated as the result of cash takeovers at substantial premiums over public
market prices.
PRINCIPAL AMOUNT
OR
NUMBER OF SHARES NEW POSITIONS ACQUIRED
$8,452,000 Frank's Nursery & Crafts, Inc. 10.25%, due 3/1/08
("Franks Subordinates")
$12,419,888 Genesis Health Ventures Revolving Loan ("Genesis Bank Debt")
10,000 shares Alico, Inc. Common Stock ("Alico Common")
148,000 shares Palm, Inc. Common Stock ("Palm Common")
249,000 shares Standex International Corp. Common Stock ("Standex Common")
700,000 shares Trinity Industries, Inc. Common Stock ("Trinity Common")
523,300 shares USG Corp. Common Stock ("USG Common")
214,700 shares Value City Department Stores, Inc. Common Stock
("Value City Common")
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PRINCIPAL AMOUNT
OR
NUMBER OF SHARES INCREASES IN EXISTING POSITIONS
$17,135,000 CareMatrix Corp. 6.25% due 8/15/04
("CareMatrix Subordinates")
$8,229,840 Safelite Glass Bank Debt ("Safelite Bank Debt")
25,000 shares Alamo Group, Inc. Common Stock ("Alamo Common")
201,000 shares AVX Corp. Common Stock ("AVX Common")
212,700 shares D.R. Horton, Inc. Common Stock ("Horton Common")
350,000 shares Electroglas, Inc. Common Stock ("Electroglas Common")
124,500 shares Enhance Financial Services Group, Inc. Common Stock
("Enhance Common")
23,500 shares Forest City Enterprises, Inc. Class A Common Stock
("Forest City Common")
572,500 shares Kendle International Inc. Common Stock ("Kendle Common")
324,500 shares Liberty Financial Companies, Inc. Common Stock
("Liberty Common")
106,900 shares Mestek, Inc. Common Stock ("Mestek Common")
965,000 shares The Nissan Fire & Marine Insurance Co., Ltd. Common Stock
("Nissan Common")
165,800 shares Silicon Valley Group, Inc. Common Stock
("Silicon Valley Common")
366,000 shares Tecumseh Products Co. Class A and Class B Common Stock
("Tecumseh Common")
800,000 shares Toyoda Automatic Loom Works, Ltd. Common Stock
("TAL Common")
8,300 shares White Mountains Insurance Group Inc. Common Stock
("White Mountains Common")
54,600 shares Woronoco Bancorp, Inc. Common Stock ("Woronoco Common")
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Peter Lynch has been appearing in many advertisements for Fidelity Investments
claiming that earnings drive stock market prices. The fact is that earnings do
drive some stock market prices but, in other cases, factors other than earnings
are much more important than reported earnings as ultimate determinants of the
values of securities.
These other factors in specific cases, include the creation of value through
reorganizing, or recapitalizing, companies whether sick or healthy; realizations
on the sale, or conversions to other uses or other ownership, of assets; and
obtaining access to capital markets at super attractive prices (such as was the
case by 1998 and 1999 for dot.com IPO's).
TAVF management attempts to have the securities in its portfolio consist of
common stocks acquired at low price:earnings ratios, say, at present, at under
10 times Fund management's best estimate of earnings for the year 2001; common
stocks acquired at huge, say 30% or more, price discounts from reasonable
estimates of such asset values; or debt instruments of troubled companies where
if a money default were to occur on that debt instrument, TAVF likely would
participate on a profitable basis in the reorganization, or liquidation, of that
troubled company.
At present, the most important parts of the TAVF portfolio consist of securities
selling at under 10 times Fund management's best estimate of 2001 earnings; and
common stocks selling at huge discounts from Net Asset Value ("NAV"). At July
31, 2000, the functional breakdown of the Third Avenue portfolio was as follows:
TYPES OF SECURITY % OF PORTFOLIO
Common stocks selling at under 10 times
estimated 2001 earnings 35.7%
Common stocks selling at huge discounts
from estimated NAV 24.6
"Grandfathered" buy and hold common stocks most
of which reflect substantial unrealized profits 20.0
Cash and cash equivalents 16.3
Debt instruments of troubled issuers 3.4
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100.0%
======
SECURITIES SELLING AT LESS THAN 10 TIMES ESTIMATED 2001 EARNINGS
At August 14, 2000 the P:E ratios, based on latest 12 months trailing earnings,
for the NASDAQ 100 was 121.5 times; and for the NASDAQ Composite, 141.8 times.
At July 28, 2000 the same P:E ratio for the Standard & Poor's 500 was 28.8
times. These ultra-high P:E ratios seem to indicate that speculative excesses
exist for those common stocks currently most popular with the investing public
and conventional money managers, especially growth managers. At the same time,
and in sharp contrast, there apparently is little marketplace interest in the
common stocks of smaller, mostly old economy, companies selling at under 10
times earnings (and usually at substantial discounts from the NAV that would be
realized if there were to be a takeover). This lack of interest for the under 10
times issues apparently arises either because the near-term outlook for these
issuers is clouded or because these companies lack general recognition as
"growth" companies. I have, for some time, been characterizing these under 10
times earnings common stocks as issues available at 1974 or 1982 prices. TAVF,
of course, has been loading up on these common stocks provided the
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companies are both well financed and well entrenched. Common stock positions
acquired during the quarter encompassed both issues acquired for the first time
-- Standex, Trinity, USG and Value City; and increases in existing common stock
positions -- Alamo, AVX, Horton, Electroglas, Enhance, Kendle, Liberty, Mestek,
Silicon Valley and Tecumseh.
Several of these under 10 times issues are participants in new economy
industries which are experiencing explosive growth -- AVX , Electroglas and
Silicon Valley. The Wall Street "buzz" seems to be that semi-conductor equipment
and wireless telephony are at cyclical peaks. There seems to be little in the
way of tangible evidence indicating that this is actually the case. Even if
true, the longer-term outlook for these companies appears to be quite bright.
USG is an interesting bet. For the first time in 25 years, I've made an
investment in the common stock of a company facing asbestos liabilities.
However, USG, and its predecessors, have not manufactured any products
containing asbestos since 1972. TAVF is betting that USG can safely handle
whatever asbestos liabilities still might be out there without compromising its
very good financial position. This now seems a reasonably safe bet.
Alamo and Kendle are comeback stories. 2001, and subsequent years, ought to be
considerably more profitable than 1999-2000. Kendle, as an independent company
performing clinical tests on new drugs, has promise on a long-term basis as a
participant in the expected growth in biotechnology and genetics. Value City is
a relatively small discount retailer controlled by the Schottenstein family who
are very significant factors in soft goods with some emphasis on distress. If I
had to pick one small company, which over time could be an effective,
profitable, competitor of Wal-Mart and Target, it would be Value City. Value
City Common was selling at around 8 times fiscal 1999 earnings at July 31.
Earnings probably will be lower in 2001 than will be the case in 2000, or was
the case in 1999, for Enhance, Horton, Mestek, Standex, Tecumseh and Trinity. At
July 31, each of these common stocks were selling at anywhere from 6 times to 8
times latest 12 months earnings. Liberty was selling at 10 times trailing
earnings. In 2001, profitability for Liberty will probably be not much better
than it was for the trailing 12 months. By and large these well-financed
businesses do not seem likely to be faced with really tough, foreseeable,
problems. Enhance is an exception. If its claims paying ability were to be
downgraded by rating agencies, then its financial insurance subsidiaries would
be adversely impacted. A good anchor to windward for the Enhance investment,
though, is that at July 31, Enhance Common was selling at about a 31% discount
from Adjusted Book Value.
Why would the high quality common stock issues in which Third Avenue is
investing be available at 1974 or 1982 prices in the midst of a roaring bull
market marked by more speculative excesses than I have seen in my lifetime? To
hazard a guess, it appears as if the speculative excesses revolve around the
consideration of only five factors by speculators: generally recognized growth;
Wall Street sponsorship; the near term outlook; macro forecasts whether for
stock market indices, interest rates or GDP; and the demand and supply of
securities, i.e., technical approaches where the analysts seem to know the price
of everything and the value of nothing. If a common stock issue does not look
attractive, based on these five oversimplifications, then, except for value
investors, there will be scant interest in that security on the part of either
the general public or conventional money managers. Bluntly, unless these people
see prospects for good near-term price performance, i.e., doing better than a
benchmark consistently, they will remain highly unlike-
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ly to acquire a common stock, no matter how cheaply priced. The general public
and conventional money managers seem to be infinitely more outlook conscious
than they are price conscious.
This emphasis on growth as THE element in the evaluation of common stocks
emanates, at least in great part, from the algebraic formulas in use in academic
finance. Indeed, a reading of the leading texts, say PRINCIPLES OF CORPORATE
FINANCE by Brealey and Myers, or CORPORATION FINANCE by Ross, Westerfield et.
al., shows that in their methodology for valuing common stocks, premium
multiples are assigned only to forecasts of growth. Of course, in the real world
there are an infinite number of factors that contribute to appreciation
potential for common stocks, and for businesses, over and above "growth." These
other factors include strong basic earning power; readily realizable assets
available at a discount; strong financial resources that might be used as a
competitive advantage, as a safety haven in troubled times, or funds to pursue a
massive common stock repurchase program; and even an apparent absence of fraud
or overreaching by managements or control groups. In fact, it seems obvious
that, on a long-term basis, far more Wall Street fortunes are the results of
financial engineering than are the result of paying retail prices for forecasts
of growth. For example, it appears that each of the common stocks acquired
during the July quarter (except for Palm Common) are extremely attractive
candidates for Leveraged Buyouts and Management Buyouts at substantial premiums
above July 31 market prices. This may be especially significant now because so
many billions of dollars have poured into Wall Street buyout funds where very
smart, very diligent, people are searching full time for attractive, and doable,
deals. Three of the Fund's portfolio companies were taken over in cash deals at
substantial premiums over market prices during the July 31 quarter. Three
takeovers a quarter at premium prices seems to have been, at least, par for the
course for TAVF.
REORGANIZATION SECURITIES AND DISCOUNTS FROM NET ASSET VALUE
Opportunities seem to abound in both the United States and Japan for TAVF to
invest in the securities of both troubled companies and healthy companies which
could benefit from restructuring their capitalizations. In the United States,
the Fund is concentrating on the debt instruments of troubled issues though not
exclusively. In Japan Third Avenue's involvement is restricted to investments in
the common stocks of very strong, very healthy, blue chips.
THE UNITED STATES
A Fund modus operandi in this country is to acquire the debt instruments of
troubled companies. The Fund tries to acquire positions of the most senior issue
likely to participate in a reorganization, i.e., a restructuring of the
capitalization. Third Avenue usually acquires enough of a class of debt issue so
that TAVF will have an important influence on the reorganization process,
whether that process takes place out of court, or in a Chapter 11 Case. Unlike
most other creditors, TAVF is disposed toward receiving at least a portion of
the consideration to be issued in a restructuring in the common stock of the
reorganized company, provided that Fund management believes that the reorganized
company will be reasonably well-capitalized and reasonably well-managed.
At the time of acquisition of these debt instruments, the Fund usually does not
know with certainty whether or not the debt instrument will be a performing
loan, i.e., the loan is to be continued to be serviced in cash in accordance
with the terms contained in the loan agreement. If the debt instrument is to
continue to be a performing loan, TAVF generally acquires at prices that result
in it receiving a current yield of over 16% or 17%, and a Yield to Maturity
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("YTM") of over 25%. (YTM combines both current yield and an amortization of the
difference between the price paid for a bond, say, 55, and the principal payment
due at maturity, almost always 100). Third Avenue sometimes acquires loans where
workout values will be strictly in the form of cash and/or new debt instruments.
Here the Fund looks for yields to workout of at least 30%.
These distress debt investments are only a small part of the TAVF portfolio
accounting for 3.4% of net assets at July 31. However, that percentage could
grow materially when, as, and if, the troubled company universe expands. A brief
review of the six issues, which make up the Fund's current troubled debt
portfolio, ought to be helpful in explaining to Third Avenue shareholders what
TAVF does in the distressed area.
CAREMATRIX SUBORDINATED DEBENTURES 6 1/4% DUE 8/15/04
The Fund owns close to half of the outstanding issue of this operator of
assisted living facilities for the elderly. The issue was acquired at prices
which result in a current yield of 21.0% and a YTM of 46.0%. The company should
reorganize in Chapter 11 in which case TAVF is likely to become a dominant
shareholder. However, the debenture could remain a performing loan for a while.
Fund management is quite high on the Carematrix operating management.
Nonetheless, there seem to be huge problems for the Fund, and other bondholders,
in dealing with the control shareholder and his captive Board of Directors.
FRANK'S NURSERY SENIOR SUBORDINATED NOTES 10 1/4% DUE 3/1/08
This is a performing loan that probably will remain a performing loan. The
instrument was acquired at a current yield of 26.4% and a YTM of 32.2%. In the
event of a money default, there appear to be very large real estate values in
Frank's Nursery so that there would be reasonable prospects for a profitable
participation in a reorganization for TAVF.
GENESIS HEALTH VENTURES BANK DEBT
This is a Chapter 11 workout in which the Fund expects to receive cash and new
debt instruments in about six months. If matters go according to plan the YTM
ought to approach 60%.
INNOVATIVE CLINICAL SOLUTIONS ("ICSL") SUBORDINATED DEBENTURES 6 3/4%
DUE 6/15/03
The Fund owns almost half the outstanding issue. ICSL, a site management
organization (for drug testing), is in the midst of a pre-packaged Chapter 11.
If the pre-pack is successfully concluded, estimated to occur this October, TAVF
will end up owning over 40% of the outstanding common stock. ICSL has yet to
demonstrate that it can achieve profitability. As such, it ought to be viewed as
an interesting, "high beta" venture capital deal. ICSL is the country's largest
player in private site management, an industry that should grow as drug testing
expands. Success, though, is far from assured. TAVF management remains very
favorably impressed with ICSL management.
HECHINGER SENIOR DEBT
This former competitor of Home Depot is in liquidation. Results are
disappointing. The ultimate workout for Hechinger ought to result in TAVF just
about recovering its $3.6 million investment in Hechinger Senior Debt. However,
a modest shortfall would not be surprising either.
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SAFELITE BANK DEBT
This provider of automotive replacement glass installations is the subject of
the equivalent of a pre-packaged Chapter 11. On consummation of the
reorganization, expected in not more than three months, TAVF will receive new
Safelite Secured Loans and new Safelite Common Stock. The expected yield to
workout, if nothing goes wrong, based on the Fund's cost, should exceed an
annual rate of 60%. However, it seems unlikely that a public market for the new
Safelite Common will develop before six months after the reorganization is
consummated.
JAPAN
Many of the best and brightest U.S. workout specialists in reorganizing troubled
companies, -- General Electric, Goldman Sachs, Cerberus and Wilbur Ross, among
others -- have brought their workout skills to Japan to restructure troubled
Japanese debtors. While the opportunities for profiting from restructuring
troubled Japanese companies and troubled Japanese real estate, seem huge; the
problems for investors in Japan seem infinitely tougher than has been, or is,
the case in the United States. In this country there has been a history dating
back to pre-colonial days, of seeking to rehabilitate troubled debtors. In
contrast, in Japan the strong tendencies are not toward rehabilitation but
rather toward either liquidating the troubled debtor's assets in fire sales, or,
alternatively, denying that any problems exist. In the United Sates, there are
well-developed bodies of law: the Bankruptcy Code, the Tax Code, Securities Law,
and the Commercial Codes in various states. Japan, hopefully, is just starting
on this path. Indeed, it's hard to say if bankruptcy reform will take hold in
Japan, given the recent mishandling of the Sogo Department Stores matter. In
Japan there is this proclivity toward rewarding the common stockholders of
troubled debtors by having the debtor seek, and frequently get, loan forgiveness
without any consideration whatsoever being given. In the United States, we don't
forgive loans for free; rather we convert them to ownership of the business.
(See Carematrix, ICSL and Safelite above.)
TAVF is unlikely to be involved in Japan in restructuring troubled companies.
However, there exist gigantic profit opportunities which may be realizable when,
as and if healthy Japanese companies start to restructure, especially by
realizing some of the values existing in various companies' holdings of
marketable securities, the so-called cross-holdings. Here, the Japanese national
interests would be served by restructurings if the sterile capital tied-up in
cross-holdings of minority interests in public companies were freed up. Such a
free up would happen if Japan were to emulate the recent German example.
Effective in 2002, Germany has eliminated the approximately 50% capital-gains
tax that a company would incur if it sold at a profit common shares of other
companies held in its portfolio. Japanese authorities might not want to
eliminate the approximately 45% tax rate applicable to capital gains altogether,
but it could reduce the tax rate to, say, 10%. Tax revenues probably would be
greater at a 10% rate, because more activity would take place, than at 45%, a
rate so high that it seems to dissuade healthy companies from selling portfolio
securities at a profit.
TAVF is trying to use whatever powers of persuasion it can muster to cause a
reorganization of Toyoda Automatic Loom Works, Ltd. ("TAL"). At best, this seems
as if it might be a two-to-four year project. TAVF has become the largest
non-Japanese holder of TAL Common having acquired 3,000,000 shares at an average
cost of $18.38 per share. TAL's NAV at July 31, 2000 seems fairly computed as
follows:
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PER SHARE
(US$ 000,000 AND PER SHARE) 315,000,000 SHARES*
----------------------------------------------- -------------------
Operating businesses
at 7x operating income of
$350 less non-convertible
long-term debt $2,000 $6.35
195.5 shares of Toyota
Motor Corp Common ("Toyota
Common") at market of $42.31
per Toyota share 8,274 26.27
Remaining portfolio of
marketable securities at
market 2,788 8.85
------
NAV-- before deferred
income taxes on unrealized
capital gains $41.47
======
Deferred capital gains taxes
on unrealized gains at
45% rate 4,220 $13.40
NAV after deduction of
deferred cap gains taxes $28.07
======
TAVF cost basis as discount
from NAV before deferred
capital gains taxes 55.7%
from NAV after deferred
capital gains taxes 34.5%
*All converted basis
The TAVF analysis of TAL is that the Fund has acquired an investment portfolio
at a huge discount from NAV, and also absolutely magnificent operating
businesses for free, or less than free. TAL is a Toyota affiliate. Toyota owns
about 25% of TAL Common and TAL, in turn, is the largest Toyota shareholder with
an approximate 5% equity interest in Toyota. TAL is a principal automotive
supplier to Toyota. TAL, which originally only manufactured textile equipment,
now a minor part of the overall operation, had founded Toyota and spun it off in
1937. The principal TAL operating businesses are as follows:
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AUTOMOTIVE:
Assembly of certain Toyota cars and the manufacture of engines, both diesel and
gasoline, as well as automotive air conditioning compressors. TAL is the world's
largest producer of air conditioning compressors with plants in Japan, the US
and Europe supplying various automotive assemblers.
LOGISTICS AND FORK LIFTS:
Adjusted for the recent acquisition of BT Industries of Sweden and the remaining
activities of Toyota in logistics and forklifts, TAL has become the world's
largest manufacturer of forklifts. These are marketed under the Toyota name. TAL
is also a major worldwide player in other materials handling equipment.
ELECTRONICS:
TAL now has a joint venture with Sony Corp to produce flat panel LCDs. The
company also produces semiconductor related products and has a joint venture
with Ibiden. TAL management hopes to grow electronics, now a minor activity, to
perhaps 1/3 of overall revenues in the coming years.
To our knowledge, no broker-dealer research department analyzes TAL the way TAVF
does based on our readings of a plethora of research reports published in
English. These analyses of TAL focus strictly on PE ratios from operations,
pretty much ignoring, or downplaying, the investment company aspects inherent in
the TAL portfolio of marketable securities.
There are potential benefits to TAL, as a corporate entity, in taking actions
that would result in the realization, at least in part, of the embedded
shareholder values. This year, for example, TAL acquired for cash BT Industries
of Sweden and all of Toyota's interests in Logistics and Forklifts for an
undisclosed consideration. There is no way, given the price of TAL Common, that
these productive assets ought to have been paid for with TAL Common, given the
public market price of TAL Common. Having a common stock price more closely
related to economic reality could prove quite helpful to TAL in the future. This
may especially be the case given TAL plans to expand aggressively into
electronics.
In the NAV calculation above, deferred capital gains taxes were deducted from
NAV at a 45% rate. In other words, the deferred taxes were treated exactly as if
they were an actual payable, similar to accounts payable or interest bearing
debt instruments. This is how accounting is done. However, the 45% rate is
utterly unrealistic. In terms of economic reality, the deferred capital gains
taxes are a materially smaller liability than would be indicated by a 45% rate
because the item is in no way the economic equivalent of an actual liability:
a) Management controls the timing of when the capital gains tax might
become payable, if ever.
b) Management can use tax planning to ameliorate the effect of potential
capital gains taxes, realizing losses on specific portfolio securities
in a given year to offset realized gains.
c) Until the capital gains tax is due, TAL has the use of the money.
d) Tax laws change over time; in the case of Japan, the odds would seem
to favor a reduction, not an increase, in capital gains tax rates.
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While deferred taxes on unrealized capital gains are not a true liability,
neither are they as valuable as tax-paid retained earnings. The economic truth
lies somewhere in between:
a) There is always a possibility that the deferred capital gains tax on
unrealized gains will become an actual tax payable.
b) The existence of a deferred tax liability can limit the flexibility of
management, and control stockholders, in terms of what can be done in
resource conversion activity, say mergers and acquisitions, without
triggering an actual tax payable.
In sum, accounting rules and conventional security analysis notwithstanding,
deferred taxes on unrealized appreciation are a liability which has a major net
worth component; or vice versa, a net worth figure with a liability component.
The percentage of the deferred tax liability that should in reality be assigned
to net worth is a matter of analytic judgment. In the case of TAL, Fund
management is inclined to assign 75% of the $13.40 per share liability to net
worth in the computation of NAV -- albeit there is no hard and fast answer.
The chances may be slim that the discount at which TAL Common sells relative to
NAV will narrow materially absent some sort of catalyst. A great catalyst would
be for TAL to spin off to its stockholders the common stock of a new company
consisting of the operating businesses and enough of the marketable securities
so that the operating businesses would remain with an extremely strong financial
position. TAL could then become an investment company, -- hopefully an open-end
mutual fund.
To accomplish this, at the minimum both TAL management and Toyota management
would have to see benefits from a spin-off for the various constituencies
affected. Among other things, there would have to be clarification of the
Japanese Tax Code to assure both TAL and Toyota that no corporate taxes would be
incurred because of the spin-off, and that the transaction would be tax-free
(i.e., tax deferred) for TAL shareholders. This seems like a Herculean task, the
resolution of which TAVF might not contribute much to at all. Nonetheless, it
ought to be noted that TAL spin-offs are not without precedent (see the 1937
spin-off of Toyota); Toyota management seems very Western oriented at least in
recognizing outside, minority shareholders as a legitimate constituency; and
sooner or later the Japanese government ought to start realizing that important
macro benefits could flow to the overall economy if corporate Japan could be
encouraged to unwind some of the huge amount of cross-holdings in existence.
The steep discount from NAV at which TAL common sells probably would be quite
difficult to find in the United States, the large size and high quality of the
underlying TAL company considered. Having said this, it should be noted that a
very substantial portion of the TAVF portfolio, almost 25%, consists of high
quality companies, where the common stocks are selling at large discounts from
NAV, and where the amount of NAV seems reasonably easy to appraise. These TAL
type issues whose common stocks are in the TAVF portfolio include Alico,
Alexander & Baldwin, Arch Capital, Capital Southwest, Catellus Development,
Forest City Enterprises, St. Joe, Tejon Ranch and six Japanese non-life
insurers.
Third Avenue management remains hopeful that a TAL catalyst will emerge in the
years just ahead. The odds may be against it. However, the Fund owns enough
high-grade issues of "discount from NAV common stocks" that the over-
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all performance of the NAV sub-portfolio ought to be okay even if TAL Common is
a non-performer. Given the prices the Fund has paid for TAL Common relative to
NAV, the cost of no catalyst developing seems minimal; -- the rewards for
success, enormous.
I will write you again when the Annual Report for the fiscal year to end October
31, 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 JULY 31, 2000
(UNAUDITED)
PRINCIPAL % OF
AMOUNT ($) ISSUES VALUE NET ASSETS
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Asset Backed Securities - 6.44%
<S> <C> <C> <C> <C>
13,350,000 Capital Auto Receivables Asset Trust
Series 1999-1 Class A-2, 5.58% due 6/15/02 $ 13,274,773
7,900,000 Capital Auto Receivables Asset Trust
Series 2000-1 Class A-2, 6.81% due 2/17/03 7,885,583
2,495,000 Chase Credit Card Master Trust
Series 1997-2 Class A, 6.30% due 4/15/03 2,495,836
4,583,906 Ford Credit Auto Owner Trust
Series 1999-B Class A-3, 5.47% due 9/15/01 4,574,395
6,649,250 Ford Credit Auto Owner Trust
Series 1998-B Class A-3, 5.85% due 10/15/01 6,638,844
4,000,000 Ford Credit Auto Owner Trust
Series 2000-B Class A-1, 6.59% due 10/15/01 3,998,180
7,481,298 Ford Credit Auto Owner Trust
Series 1999-C Class A-3, 5.77% due 11/15/01 7,463,904
6,515,995 Ford Credit Auto Owner Trust
Series 1998-C Class A-4, 5.81% due 3/15/02 6,493,091
13,619,000 Ford Credit Auto Owner Trust
Series 1999-B Class A-4, 5.80% due 6/15/02 13,502,081
1,400,000 Ford Credit Auto Owner Trust
Series 1998-B Class A-4, 5.90% due 6/15/02 1,388,359
17,500,000 Ford Credit Auto Owner Trust
Series 2000-A Class A-3, 6.82% due 6/17/02 17,481,187
5,000,000 Ford Credit Auto Owner Trust
Series 2000-C Class A-3, 7.13% due 9/15/02 5,001,425
15,000,000 Ford Credit Auto Owner Trust
Series 1999-C Class A-4, 6.08% due 9/16/02 14,870,775
5,000,000 Ford Credit Auto Loan Master Trust
Series 1996-1 Class A, 5.50% due 2/15/03 4,957,525
------------
TOTAL ASSET BACKED SECURITIES
(Cost $109,829,938) 110,025,958 6.44%
------------
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12
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 2000
(UNAUDITED)
PRINCIPAL % OF
AMOUNT ($) ISSUES VALUE NET ASSETS
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BANK AND OTHER DEBT - 0.94%
Healthcare 12,419,888 Genisis Health Ventures Revolving Loan $ 7,886,628 0.46%
------------
Auto Supply 4,064,333 Safelite Glass Bank Debt A (c) 1,869,593
5,713,137 Safelite Glass Bank Debt B (c) 2,628,043
5,713,137 Safelite Glass Bank Debt C (c) 2,628,043
------------
7,125,679 0.42%
------------
Oil Services 1,067,230 Cimarron Petroleum Corp. (c) (d) 1,019,754 0.06%
------------
Retail 284,760 Lechmere, Inc. Trade Claim (a) (c) 3,702
150,959 Montgomery Ward Trade Claim (a) (c) 53,402
------------
57,104 0.00%
------------
TOTAL BANK AND OTHER DEBT
(Cost $17,096,524) 16,089,165
------------
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CONVERTIBLE BONDS - 1.76%
Assisted Living Facilitiies 56,534,000 CareMatrix Corp. 6.25%, due 8/15/04 13,992,165 0.82%
------------
Pharmaceutical Services 49,155,000 Innovative Clinical Solutions, Ltd. 6.75%, due 6/15 15,975,375 0.94%
------------
TOTAL CONVERTIBLE BONDS
(Cost $40,199,260) 29,967,540
------------
------------------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS - 0.79%
Bermuda Based Financial Institutions 7,500,000 CGA Special Account Trust (b) (c) 7,500,000 0.44%
------------
Lawn and Garden Retail 8,452,000 Frank's Nursery & Crafts, Inc. 10.25%, due 3/1/08 3,127,240 0.18%
------------
Hard Goods Retail 24,900,000 Hechinger Co. 6.95%, due 10/15/03* 2,116,500
8,500,000 Hechinger Co. 9.45%, due 11/15/12* 722,500
------------
2,839,000 0.17%
------------
TOTAL CORPORATE BONDS
(Cost $14,374,131) 13,466,240
------------
SHARES
------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS AND WARRANTS - 77.98%
Annuities & Mutual Fund 10,000 Atalanta/Sosnoff Capital Corp. (a) 100,000
Management & Sales 163,300 John Nuveen & Co., Inc. Class A 7,297,469
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 2000
(UNAUDITED)
% OF
SHARES ISSUES VALUE NET ASSETS
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONTINUED)
1,050,000 Liberty Financial Companies, Inc. $ 23,100,000
------------
30,497,469 1.78%
------------
Apparel Manufacturers 150,000 Kleinerts, Inc. (a) (c) 1,800,000 0.10%
------------
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) 436,780
15,675 ESG Re, Ltd. Warrants (c) 1
295,217 LaSalle Re Holdings, Ltd. 5,018,689
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
------------
5,563,746 0.33%
------------
Building Materials 523,300 USG Corp. 15,371,938 0.90%
------------
Business Development 432,300 Arch Capital Group, Ltd. (a) 6,700,650
& Investment Companies 78,245 Capital Southwest Corp. 4,499,087
------------
11,199,737 0.66%
------------
Computerized Trading 223,600 Investment Technology Group, Inc. 10,872,550 0.64%
------------
Computers, Networks 100,000 3Com Corp. (a) 1,356,250
& Software 148,000 Palm, Inc. 5,772,000
------------
7,128,250 0.42%
------------
Depository Institutions 53,000 Astoria Financial Corp. 1,543,625
69,566 Banknorth Group, Inc. 1,065,229
218,500 Carver Bancorp, Inc. (b) 2,266,937
61,543 Commercial Federal Corp. 1,092,388
197,307 Golden State Bancorp, Inc. (a) 3,773,496
53,480 Golden State Bancorp, Inc. Warrants, 9/17/00 (a) 434,525
197,307 Golden State Bancorp, Inc. Litigation
Tracking Warrants (a) 228,136
41,100 Tompkins Trustco, Inc. 986,400
402,800 Woronoco Bancorp, Inc. (b) 4,783,250
------------
16,173,986 0.95%
------------
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 2000
(UNAUDITED)
% OF
SHARES ISSUES VALUE NET ASSETS
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONTINUED)
Electronics 3,534,400 AVX Corp. $ 84,604,699
1,125,000 Electro Scientific Industries, Inc. (a) 51,117,188
------------
135,721,887 7.95%
------------
Financial Insurance 200,000 Ambac Financial Group, Inc. (j) 12,887,500
1,951,000 Enhance Financial Services Group, Inc. 30,850,187
1,076,073 MBIA Inc. 59,923,815
------------
103,661,502 6.07%
------------
Food Manufacturers 328,000 J & J Snack Foods Corp. (a) 4,879,000
& Purveyors 109,100 Weis Markets, Inc. 3,818,500
------------
8,697,500 0.51%
------------
Home Building 657,000 D.R. Horton, Inc. 10,183,500 0.60%
------------
Industrial Equipment 423,900 Alamo Group, Inc. 5,510,700
123,900 Cummins Engine Co., Inc. 3,964,800
125,200 Mestek, Inc. (a) 2,104,925
249,000 Standex International Corp. 4,295,250
385,400 Tecumseh Products Co. Class A (b) 13,681,700
626,400 Tecumseh Products Co. Class B (b) (j) 21,924,000
700,000 Trinity Industries, Inc. 13,475,000
------------
64,956,375 3.80%
------------
Industrial-Japan 3,000,000 Toyoda Automatic Loom Works, Ltd. 68,308,536 4.00%
------------
Insurance Holding 87,035 ACE Ltd. 3,133,260
Companies 200,678 ACMAT Corp. Class A (a) (b) 1,404,746
803,669 Danielson Holding Corp. (a) (b) (c) 4,018,345
5,490 Sen-Tech International Holdings, Inc. (a) (c) 3,294,000
58,300 White Mountains Insurance Group Inc. 9,153,100
------------
21,003,451 1.23%
------------
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 2000
(UNAUDITED)
% OF
SHARES ISSUES VALUE NET ASSETS
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONTINUED)
Manufactured Housing 89,000 Liberty Homes, Inc. Class A $ 550,688
40,000 Liberty Homes, Inc. Class B (j) 250,000
------------
800,688 0.05%
------------
Medical Supplies 145,500 Analogic Corp. 6,693,000
& Services 342,300 Datascope Corp. 12,921,825
554,950 Prime Medical Services, Inc. (a) 4,508,969
90,750 St. Jude Medical, Inc. (a) 3,743,437
------------
27,867,231 1.63%
------------
Natural Resources & 1,160,000 Alexander & Baldwin, Inc. 29,217,500
Real Estate 10,000 Alico, Inc. 167,500
179,600 Catellus Development Corp. (a) 3,098,100
31,000 Consolidated-Tomoka Land Co. 375,875
573,500 Forest City Enterprises, Inc. Class A 19,714,062
7,500 Forest City Enterprises, Inc. Class B 273,750
473,489 HomeFed Corp. (a) 333,810
1,180,336 Koger Equity, Inc. 19,991,941
14,600 LNR Property Corp. 296,562
846 Public Storage, Inc. 21,679
238,200 The St. Joe Co. 7,086,450
3,045,508 Tejon Ranch Co. (a) (b) (c) 73,663,225
------------
154,240,454 9.03%
------------
Non-Life Insurance-Japan 7,319,000 Mitsui Marine & Fire Insurance Co., Ltd. 32,595,282
7,399,000 The Chiyoda Fire & Marine Insurance Co., Ltd. 22,755,485
2,344,000 The Nissan Fire & Marine Insurance Co., Ltd. 7,144,753
3,246,000 The Sumitomo Marine & Fire Insurance Co., Ltd. 18,010,894
1,520,800 The Tokio Marine & Fire Insurance Co., Ltd.,
Sponsored ADR 76,610,300
3,000,000 The Yasuda Fire & Marine Insurance Co., Ltd. 13,908,111
------------
171,024,825 10.02%
------------
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 2000
(UNAUDITED)
% OF
SHARES ISSUES VALUE NET ASSETS
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONTINUED)
Oil Services 500,000 Nabors Industries, Inc. (a) $ 20,812,500 1.22%
------------
Paper & Related
Products 110,174,479 Repap Enterprises Inc. (a) (b) 7,602,039 0.45%
------------
Pharmaceutical Services 919,500 Kendle International Inc. (a) 6,953,719
588,000 PAREXEL International Corp. (a) 5,843,250
400,000 Pharmaceutical Product Development, Inc. (a) (j) 8,550,000
------------
21,346,969 1.25%
------------
Retail 214,700 Value City Department Stores, Inc. 1,878,625 0.11%
------------
Security Brokers, 223,600 Jefferies Group, Inc. 5,981,300
Dealers & 893,332 Legg Mason, Inc. 46,453,264
Flotation Companies 1,086,250 Raymond James Financial, Inc. 27,156,250
------------
79,590,814 4.66%
------------
Semiconductor 200,000 Applied Materials, Inc. (a) 15,175,000
Equipment Manufacturers 1,004,500 C.P. Clare Corp. (a) (b) 5,336,406
and Related 1,742,300 Electroglas, Inc. (a) (b) 34,846,000
2,320,900 FSI International, Inc. (a) (b) 38,149,794
100,000 GaSonics International Corp. (a) 2,400,000
100,000 KLA-Tencor Corp. (a) 5,325,000
300,000 Photronics, Inc. (a) 7,443,750
4,094,200 Silicon Valley Group, Inc. (a) (b) 103,890,325
500,000 Veeco Instruments, Inc. (a) (j) 39,375,000
------------
251,941,275 14.75%
------------
Small-Cap Technology 424,000 Hypercom Corp. (a) 3,975,000
247,200 Planar Systems, Inc. (a) 3,599,850
1,499 Simione Central Holdings, Inc. (a) 2,811
------------
7,577,661 0.44%
------------
Title Insurance 3,201,800 First American Corp. (b) 49,828,013
1,951,400 Stewart Information Services Corp. (b) 25,856,050
------------
75,684,063 4.43%
------------
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 2000
(UNAUDITED)
% OF
SHARES ISSUES VALUE NET ASSETS
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS AND WARRANTS (CONTINUED)
TOTAL COMMON STOCKS AND WARRANTS
(Cost $896,299,749) $1,331,507,571
--------------
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PREFERRED STOCK - 1.53%
Bermuda Based 665,746 CGA Group, Ltd., Series A (b) (c) 16,643,651
Financial Institutions 6,045,667 CGA Group, Ltd., Series C (b) (c) 7,039,176
--------------
23,682,827 1.39%
--------------
Financial Insurance 2,500 American Capital Access Holdings, LLC (c) 2,500,000 0.14%
--------------
Insurance Holding
Companies 4,775 Ecclesiastical Insurance, 8.625% 7,152 0.00%
--------------
TOTAL PREFERRED STOCK
(Cost $23,969,001) 26,189,979
--------------
INVESTMENT
AMOUNT ($)
------------------------------------------------------------------------------------------------------------------------------
LIMITED PARTNERSHIPS - 0.76%
Bermuda Based 2,215,000 ESG Partners, LP (c) 390,150 0.02%
Financial Institutions --------------
Financial Insurance 15,000,000 American Capital Access Holdings, LLC (c) 7,500,000 0.44%
--------------
Insurance Holding 3,667,341 Head Insurance Investors LP (c) 3,713,329
Companies 1,330,000 Insurance Partners II Equity Fund, LP (c) 1,330,000
--------------
5,043,329 0.30%
--------------
TOTAL LIMITED PARTNERSHIPS
(Cost $22,267,756) 12,933,479
--------------
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 2000
(UNAUDITED)
NOTIONAL % OF
PRINCIPAL ($) ISSUES VALUE NET ASSETS
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FOREIGN CURRENCY SWAP CONTRACTS - (0.23%)
50,000,000 Bear Stearns Currency Swap,
Termination Date 10/27/00 (c) (e) $ 2,389,800
150,000,000 Bear Stearns Currency Swap,
Termination Date 4/17/01 (c) (f) (6,397,888)
--------------
(4,008,088) (0.23%)
--------------
TOTAL OTHER INVESTMENTS
(Cost $0) (4,008,088)
--------------
PRINCIPAL
AMOUNT ($)
------------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS - 10.32%
Repurchase Agreements 61,186,524 Bear Stearns 6.57%, due 8/1/00 (g) 61,186,524 3.58%
--------------
Repurchase Agreements - 1,339,797 Bear Stearns 3.34%, due 8/1/00 (i) 1,339,797
Collateral on Securities 5,054,600 Bear Stearns 6.81%, due 8/1/00 (i) 5,054,600
Loaned --------------
6,394,397 0.38%
--------------
U.S. Treasury Bills 40,000,000 U.S. Treasury Bill 5.87%+, 10/26/00 39,426,680
35,000,000 U.S. Treasury Bill 5.99%+, 10/26/00 34,495,825
570,000 U.S. Treasury Bill 5.57%+, 12/07/00 (h) 557,860
35,000,000 U.S. Treasury Bill 5.96%+, 12/21/00 34,163,360
--------------
108,643,725 6.36%
--------------
TOTAL SHORT TERM INVESTMENTS
(Cost $176,266,140) 176,224,646
--------------
TOTAL INVESTMENT PORTFOLIO - 100.29%
(Cost $1,300,302,499) 1,712,396,490
--------------
LIABILITIES NET OF
CASH AND OTHER ASSETS - (0.29%) (4,885,152)
--------------
NET ASSETS - 100.00% $1,707,511,338
==============
(Applicable to 46,023,934
shares outstanding)
NET ASSET VALUE PER SHARE $37.10
======
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 2000
(UNAUDITED)
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 5.2 billion Yen and paying an interest rate of 0.22% in
exhange for 50 million U.S. Dollars and an interest rate of 6.29%.
(f) The Fund is selling 15.9 billion Yen and paying an interest rate of 0.38%
in exhange for 150 million U.S. Dollars and an interest rate of 6.85%.
(g) Repurchase agreement collateralized by:
U.S. Treasury Strips, par value $64,410,000, matures 11/15/16, market value
$24,053,270.
U.S. Treasury Strips, par value $38,447,000, matures 5/15/17, market value
$13,925,119.
U.S. Treasury Strips, par value $68,460,000, matures 8/15/17, market value
$24,432,005.
(h) Security segregated for future Fund commitments.
(i) Repurchase agreements collateralized by:
U.S. Treasury Strips, par value $3,660,000, matures 11/15/16, market value
$1,366,790.
U.S. Treasury Strips, par value $14,450,000, matures 8/15/17, market value
$5,156,916.
(j) Securities in whole or in part on loan.
* Issuer in default.
+ Annualized yield at date of purchase.
ADR: American Depository Receipt.
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20
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE SMALL-CAP VALUE FUND
Dear Fellow Shareholders:
At July 31, 2000, the end of the third fiscal quarter, the unaudited net asset
value attributable to the 10,009,958 common shares outstanding of Third Avenue
Small-Cap Value Fund ("Small-Cap Value" or the "Fund") was $13.26 per share.
This compares with the Fund's unaudited net asset value of $12.51 per share at
April 30, 2000; and an unaudited net asset value, adjusted for a subsequent
distribution to shareholders, of $11.54 per share at July 31, 1999. At August
25, 2000, the net asset value was $14.05.
QUARTERLY ACTIVITY
During the quarter, Small-Cap Value established two new positions, added to four
of its 37 existing positions, reduced its holdings in three companies, and
eliminated positions in three companies. At July 31, 2000, Small-Cap Value held
positions in 36 companies, the top 10 positions of which accounted for
approximately 40% of the Fund's net assets.
NUMBER OF SHARES NEW POSITIONS ACQUIRED
150,000 shares Trinity Industries, Inc. Common Stock ("Trinity Common")
38,400 shares USG Corp. Common Stock ("USG Common")
INCREASES IN EXISTING POSITIONS
1,000 shares Bel Fuse, Inc. Class B Common Stock ("Bel Fuse B Common")
12,400 shares Century Aluminum Co. Common Stock ("Century Common")
14,000 shares Enhance Financial Services Group, Inc. Common Stock
("EFS Common")
10,000 shares Silicon Valley Group, Inc. Common Stock ("SVG Common")
DECREASES IN EXISTING POSITIONS
208,400 shares ACT Networks, Inc. Common Stock ("ACT Common")
24,300 shares Centigram Communications Corp. Common Stock
("Centigram Common")
5,000 shares ValueVision International, Inc. Class A Common Stock
("ValueVision Common")
POSITIONS ELIMINATED
210,000 shares Evans & Sutherland Computer Corp. Common Stock
("E&S Common")
76,000 shares Financial Security Assurance Holdings Ltd. Common Stock
("FSA Common")
283,000 shares Protocol Systems, Inc. Common Stock ("Protocol Common")
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21
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[THIRD AVENUE FUNDS LOGO]
Our new positions in Trinity Common and USG Common represent archetype
investments for Third Avenue. Both companies are well financed and reasonably
managed, and both companies can boast of long-standing and leading positions in
their respective businesses. While the near-term earnings outlook for each has
weakened meaningfully, a weakening that largely accounts for the currently
depressed stock prices (and our opportunity), in each case both companies have
real, longer-term opportunities to expand and build their businesses.
Trinity Industries is a diversified industrial company that manufactures and
markets railroad freight cars, inland barges, concrete and aggregates, and
highway construction products. A downturn in the rail segment, the company's
main business, has translated to temporarily lower earnings and, not
surprisingly, low expectations. The company's other businesses appear to be
growing and we expect that, in time, growth in the rail segment will resume as
well. With only very modest levels of financial leverage, this combination of
industrial businesses has historically and should continue to produce attractive
returns on equity. Management has suggested that it will continue to grow the
business in a manner that makes it less cyclical, and use its prominent market
positions to leverage the tools of the "New Economy." The public markets today
value the company at levels significantly below what a financial or strategic
buyer might pay for the entire business. Trinity Common can be purchased today
at levels not seen in several years.
USG Corporation is the largest supplier of gypsum wallboard in the United States
and, through its L&W Supply subsidiary, the leading specialty building products
distributor in the United States. The company also produces ceiling tiles, joint
compounds and other building products. USG produces its wallboard under its
SHEETROCK brand name, a name that should be familiar to many of you
do-it-yourselfers. USG Common appears to be depressed for at least a couple of
reasons. For one, the company continues to carry an asbestos-related liability,
a liability that we think is containable and manageable, and one that could
achieve considerable clarification in the next two or three years. Secondly, it
looks as if more wallboard manufacturing capacity is set to come on stream by
year-end, pressuring pricing just as demand may be ebbing with a peak in the
building cycle. The currently depressed levels of USG Common seem to discount
these negatives and a whole lot more. The markets have priced USG Common as if a
severe recession were just around the next bend. Nevertheless, we believe that
we own a well managed and operationally sound business with very attractive,
longer-term earning power.
The Fund also made significant sales of holdings during the quarter, largely in
response to merger and acquisition activity. The number of positions sold in
part or total and the dollar amount of sales activity during the quarter should
be regarded as somewhat of an anomaly in as much as they coincided in the same
quarter. As a result of these sales, however, the Fund presently sits with
higher than normal levels of cash.
Two positions, Protocol Common and FSA Common, were sold to corporate buyers who
made cash offers for those companies. The Fund sold a large majority of its
position in ACT Networks in response to a stock-for-stock deal from Clarent
Corporation. ADC Telecommunications acquired Centigram Communications on July
26; the Fund received the proceeds from this acquisition on August 7, 2000. In
each case, the buyers paid significant premiums to both the Fund's cost and
current market prices. This buyout activity, no doubt, has been a significant
positive contributor to the Fund's overall performance to date.
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22
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[THIRD AVENUE FUNDS LOGO]
E&S Common was sold in response to negative developments at that company. Evans
& Sutherland's balance sheet has weakened considerably since the Fund's initial
purchases, business conditions have become undeniably more difficult, and
management -- despite much optimism -- utterly failed to improve the earning
power and economics of the business during the past three years.
The sales activity accounted for approximately $15 million of the $24 million of
cash reported at quarter's end. Had these resource conversion events not all
occurred during the same quarter, the Fund's cash position would have been in
its normal 5% to 10% range. It's possible that the cash position of the Fund may
increase, at least temporarily, during the fourth quarter as we execute the
Fund's tax planning strategies (which may entail some sales to realize capital
losses). All of this cash should be a source of comfort, as it provides us with
a "war chest" for future acquisitions.
WHY INVEST IN SMALL CAP STOCKS?
I have been asked repeatedly during the past year, "Why invest in small cap,
value stocks?" I think the answer can be summed up neatly in two letters, "M and
A." As noted above, the Fund has benefited from heightened merger and
acquisition activity as the values of our underpriced assets get recognized by
corporate or financial buyers. The recent leveraged buyouts ("LBO") of Johns
Manville and MascoTech (not owned by our Fund) by two high-profile groups
underscore the opportunities that exist in many smaller, undervalued companies.
As private equity and LBO firms have raised record amounts of capital during the
past two years -- more than $100 billion by some estimates -- we expect the
flurry of M&A activity to continue unabated as this new capital gets allocated
and as long as the public markets continue to ignore the values inherent in the
kinds of businesses owned by the Fund.
I look forward to writing you again when we publish our Annual Report dated
October 31, 2000.
Sincerely,
/s/ Curtis R. Jensen
Curtis R. Jensen
Co-manager, Third Avenue Small-Cap Value Fund
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
PORTFOLIO OF INVESTMENTS
AT JULY 31, 2000
(UNAUDITED)
% OF
SHARES ISSUES VALUE NET ASSETS
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS - 81.72%
Bermuda Based Financial 135,400 LaSalle Re Holdings, Ltd. $ 2,301,800 1.73%
------------
Institutions
Building Materials 38,400 USG Corp. 1,128,000 0.85%
------------
Construction-Japan 293,900 Sawako Corp., Sponsored ADR 1,249,075 0.94%
------------
Financial Insurance 41,500 Enhance Financial Services Group, Inc. 656,219
154,822 MBIA Inc. 8,621,650
------------
9,277,869 6.99%
------------
Industrial Equipment 310,000 Alamo Group, Inc. 4,030,000
150,000 Trinity Industries, Inc. 2,887,500
------------
6,917,500 5.21%
------------
Life Insurance 179,000 FBL Financial Group, Inc. Class A 2,416,500 1.82%
------------
Manufactured Housing 184,300 Skyline Corp. 3,720,556 2.80%
------------
Media 120,000 ValueVision International, Inc. Class A (a) 1,867,500 1.41%
------------
Metal & Metal Products 39,000 Century Aluminum Co. 511,875 0.38%
------------
Natural Resources & 187,500 Alexander & Baldwin, Inc. 4,722,656
Real Estate 187,300 Alico, Inc. 3,137,275
139,000 Avatar Holdings, Inc. (a) (b) 2,919,000
126,900 Cabot Industrial Trust 2,601,450
227,400 Deltic Timber Corp. 4,704,338
206,000 Koger Equity, Inc. 3,489,125
200,000 Tejon Ranch Co. (a) (d) 4,837,500
1,104,700 The TimberWest Forest Corp. (Canada) 7,435,352
------------
33,846,696 25.50%
------------
Non-Life 2,025,000 The Nissan Fire & Marine
Insurance-Japan Insurance Co., Ltd. 6,172,409 4.65%
------------
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THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 2000
(UNAUDITED)
% OF
SHARES ISSUES VALUE NET ASSETS
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS (CONTINUED)
Paper & Related 12,253,700 Repap Enterprises Inc. (a) $ 845,505 0.64%
Products ------------
Pharmaceutical Services 76,400 Kendle International Inc. (a) 577,775
58,100 PAREXEL International Corp. (a) 577,369
93,000 Pharmaceutical Product Development, Inc. (a) (b) 1,987,875
------------
3,143,019 2.37%
------------
Retail 426,100 HomeBase, Inc. (a) (b) 1,038,619
261,700 Value City Department Stores, Inc. (a) 2,289,875
------------
3,328,494 2.51%
------------
Semiconductor 484,800 C.P. Clare Corp. (a) (c) 2,575,500
Equipment Manufacturers 100,000 Electroglas, Inc. (a) (b) 2,000,000
and Related 293,900 FSI International, Inc. (a) 4,830,981
109,000 Silicon Valley Group, Inc. (a) 2,765,875
150,000 SpeedFam-IPEC, Inc. (a) 2,971,875
------------
15,144,231 11.41%
------------
Technology 94,400 ACT Networks, Inc. (a) 1,286,200
26,000 Bel Fuse, Inc. Class A (a) 786,500
133,400 Bel Fuse, Inc. Class B (b) 3,668,500
165,000 Centigram Communications Corp. (a) 4,320,938
257,300 Planar Systems, Inc. (a) 3,746,931
------------
13,809,069 10.40%
------------
Title Insurance 179,800 First American Corp. 2,798,137 2.11%
------------
TOTAL COMMON STOCKS
(Cost $105,850,881) 108,478,235
------------
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE SMALL-CAP VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 2000
(UNAUDITED)
NOTIONAL % OF
AMOUNT ($) ISSUES VALUE NET ASSETS
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FOREIGN CURRENCY SWAP CONTRACTS - (0.07%)
6,000,000 Bear Stearns Currency Swap,
Termination Date 2/28/01 (d) (e) $ (92,732) (0.07%)
--------------
TOTAL OTHER INVESTMENTS
(Cost $0) (92,732)
--------------
PRINCIPAL
AMOUNT ($)
-----------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS - 12.00%
Repurchase Agreements 12,525,347 Bear Stearns 6.57%, due 8/1/00 (f) 12,525,347 9.44%
--------------
Repurchase Agreements - 8,650 Bear Stearns 3.34%, due 8/1/00 (g) 8,650
Collateral on Securities 3,392,100 Bear Stearns 6.81%, due 8/1/00 (g) 3,392,100
--------------
Loaned 3,400,750 2.56%
--------------
TOTAL SHORT TERM INVESTMENTS
(Cost $15,926,097) 15,926,097
--------------
TOTAL INVESTMENT PORTFOLIO - 93.65%
(Cost $121,776,978) 124,311,600
--------------
OTHER ASSETS
LESS LIABILITIES - 6.35% 8,426,938
--------------
NET ASSETS - 100.00% $ 132,738,538
==============
(Applicable to 10,009,958
shares outstanding)
NET ASSET VALUE PER SHARE $13.26
======
</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) The Fund is selling 667 million Yen and paying an interest rate of 0.25% in
exchange for 6 million U.S. Dollars and an interest rate of 6.73%.
(f) Repurchase agreement collateralized by:
U.S. Treasury Strips, par value $34,215,000, matures 11/15/16, market value
$12,777,250.
(g) Repurchase agreement collateralized by:
U.S. Treasury Strips, par value $25,000, matures 11/15/16, market value
$9,336.
U.S. Treasury Strips, par value $9,270,000, matures 11/15/16, market value
$3,461,789.
ADR: American Depository Receipt.
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE REAL ESTATE VALUE FUND
Dear Fellow Shareholders:
At July 31, 2000, the end of the third fiscal quarter of 2000, the unaudited net
asset value attributable to the 1,580,442 shares outstanding of the Third Avenue
Real Estate Value Fund (the "Fund") was $13.05 per share. This compares with an
unaudited net asset value of $12.07 per share at April 30, 2000, and an
unaudited net asset value, adjusted for a subsequent distribution to
shareholders, of $11.43 per share at July 31, 1999. At August 25, 2000, the
unaudited net asset value was $13.53 per share.
QUARTERLY ACTIVITY
During the quarter, the Fund established new positions in the senior notes of
two companies, the senior subordinated notes of one company and the common stock
of three companies. The Fund increased its position in the common stocks of
eight companies, reduced its position in the common stock of one company, and
eliminated its position in the common stock of one company as a result of a
resource conversion.
PRINCIPAL AMOUNT
OR
NUMBER OF SHARES POSITION ACQUIRED
$750,000 Ocwen Asset Investment Corp., 11.50% Senior Notes due
7/1/05 ("Ocwen Notes")
$300,600 Frank's Nursery & Crafts, Inc., 10.25% Senior
Subordinated Notes due 3/1/08 ("Frank's Notes")
$700,000 Rockefeller Center Properties, Inc. Zero Coupon
Convertible Debentures due 12/31/00
("Rockefeller Notes")
21,928 shares Lennar Corp. Common Stock ("Lennar Common")
39,100 shares Tejon Ranch Co. Common Stock ("Tejon Common")
13,000 shares USG Corp. Common Stock ("USG Common")
INCREASES IN EXISTING POSITIONS
10,400 shares Avatar Holdings, Inc. Common Stock ("Avatar Common")
3,500 shares Centex Corp. Common Stock ("Centex Common")
43,100 shares Commercial Assets, Inc. Common Stock
("Commercial Common")
8,000 shares Consolidated-Tomoka Land Co. Common Stock
("Consolidated Common")
7,500 shares D.R. Horton, Inc. Common Stock ("Horton Common")
22,600 shares LNR Property Corp. Common Stock ("LNR Common")
18,200 shares The St. Joe Co. Common Stock ("St. Joe Common")
26,200 shares Wellsford Real Properties, Inc. Common Stock
("Wellsford Common")
POSITIONS DECREASED
25,000 shares United Investors Realty Trust Common Stock
("United Common")
POSITIONS ELIMINATED
14,700 shares U.S. Home Corp. Common Stock ("U.S. Home Common")
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Ocwen Asset Investment Corp. was formerly a publicly traded real estate
investment trust that invested in variety of real estate assets, including
subordinate and interest-only interests in mortgage-backed securities;
distressed commercial and multifamily properties; and mortgage loans on
commercial, multifamily and residential properties. In October 1999, through a
merger approved by shareholders, the company became a wholly owned subsidiary of
Ocwen Financial Corp. Ocwen Notes are senior unsecured obligations of the
company and cross-defaulted with the obligations of the parent company. The
company has liquidated a substantial portion of its mortgage-backed securities
portfolio and paid down debt with the proceeds. The majority of the company's
remaining assets consist of a portfolio of office and retail properties, most of
which are listed for sale. We think there is a good chance the company will use
the sale proceeds to make a tender offer on the Ocwen Notes at a discount to
face value -- but at a substantial premium to the Fund's cost basis. The Fund
acquired Ocwen Notes at yield-to-maturity of about 18%, which appears to be our
downside based on the substantial asset coverage.
Frank's Nursery & Crafts operates the largest chain of specialty retail stores
in the United States devoted to the sale of lawn and garden products. The
company also sells dried and artificial flowers, crafts and seasonal
merchandise. The company has 257 stores, 118 of which are leased and 139 are
owned. The typical store is generally located on a 3-acre site, has
approximately 18,000 square feet of indoor building area, 17,000 square feet of
outdoor selling area and ample onsite parking. Most stores are freestanding and
located adjacent to or near shopping centers. The company has recently
experienced declining sales and margins, which it attributes to the unseasonably
wet and cold weather in the Northeast and Midwest. Weak operating results has
caused the company to be out of compliance with covenants under its credit
facility. The company was able to obtain an amendment to the credit facility,
but the amendment reduces the company's financial flexibility. We recently
visited a number of the company's Northeast stores and observed that the stores
are well stocked with quality merchandise and well staffed with knowledgeable
personnel. Despite competition from Home Depot and others, Frank's appears to
have a viable business. The obvious problem is the company's ability to
comfortably service its debt. The Fund acquired Frank's Notes at a substantial
discount to par and a yield to maturity of more than 30%. If the company is able
to turn around its operations, we will have a performing instrument with a very
attractive yield. If the company defaults on the notes and files for bankruptcy
protection, we would expect to participate in a reorganization and receive
substantial equity in the reorganized company. Our backstop is the value of the
real estate, which we estimate in liquidation would return substantially more
than our cost basis.
Rockefeller Notes are an obligation of RCPI Trust, which owns Rockefeller
Center, one of the best-known commercial real estate complexes in the world. The
property includes 12 buildings having approximately 7.4 million square feet of
rentable office, retail, storage and studio space (including approximately 1.5
million square feet owned by NBC). The Rockefeller Notes have a zero coupon and
accrete to par on the maturity date, December 31, 2000. Upon maturity, the notes
will convert to floating rate notes bearing interest at 1% over 90-day LIBOR,
with quarterly interest payments, then maturing on December 31, 2007. The total
outstanding face amount of the Rockefeller Notes is $586.2 million. Rockefeller
Center is reportedly for sale with an asking price of about $2 billion. With
such a large equity cushion, we view the Rockefeller Notes as having extremely
low credit risk. At our acquisition cost, we have locked in about a 10% yield to
maturity (assuming no change in interest rates) and we think there is a good
chance the notes will be paid off upon a sale of the property. In this event,
our annualized yield would be substantially higher.
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The Fund received Lennar Common in exchange for its position in U.S. Home
Common, which we acquired earlier this year. Lennar Corp. completed its
acquisition of U.S. Home Corp. in May 2000 by issuing a combination of cash and
new common shares. The combined company is now the largest publicly traded
homebuilder in the United States with major market shares in California, Texas
and Florida and homebuilding operations in 10 additional states. Lennar builds
homes for first-time buyers, move-up buyers and active adults. Lennar has an
exceptionally strong balance sheet and one of the best management teams in the
homebuilding business. The Fund's effective acquisition cost of Lennar Common
was at a discount to book value and a P/E ratio of less than 6 times trailing
earnings. Over the last 5 years, Lennar Common has traded at an average of 2.1
times book value and 11.3 times earnings; and peaking at 4 times book value and
20 times earnings. It appears to us that the market has overreacted to fears of
a slowdown as a result of higher interest rates. The company's financial
strength should enable it to not only withstand any downturn in housing, but
also increase market share during such periods.
Tejon Ranch Corp. is the largest contiguous landowner in California with
approximately 270,000 acres located in Los Angeles and Kern Counties.
Historically, the company has specialized in livestock, farming and natural
resource management. In 1996, the company brought in new management with a
mandate to create and implement a strategic plan of developing its land along
transportation corridors into master planned business and residential
communities. The first development, Tejon Industrial Complex--located along
Interstate 5 on the north end of the property -- is underway and appears to be
attracting significant interest from major users like Ikea, which has recently
agreed to purchase an 80-acre site on which it will build a 1.8 million square
foot distribution center. On the south end of the property, in Los Angeles
County, the company has entered into a joint venture with three of California's
largest homebuilders for the planning and development of a master planned
community encompassing over 4,000 acres. The development process in California
can take several years from planning phase to construction phase, but I am
impressed with what management has been able to accomplish to date.
Additionally, after visiting the property, I am encouraged that the location and
character of the land will lend itself to successful long-term developments. The
Fund's investment in Tejon Common was made at a significant discount to our
conservative estimate of the net present value of future cash flows from
developments.
USG Corp. is the largest manufacturer and supplier of gypsum wallboard
(SHEETROCK brand) in the United States and, through its L&W Supply subsidiary,
the leading specialty building products distributor in the United States. The
company also produces ceiling tiles, joint compounds and other building
products. USG Common has been depressed for the last year, primarily due to a
combination of softening demand and growing industry capacity putting downward
pressure on wallboard prices. Additionally, recent interest rate increases are
expected to have a negative effect on the homebuilding industry, further
reducing demand. USG has a very strong balance sheet and quality management and
is the lowest cost producer of wallboard in the United States. With its
financial flexibility, USG should be able to manage its operations to maintain
profitability even during a severe recession. Recent prices for USG Common seem
to reflect a worst-case scenario. While the near-term outlook may not be
terrific for the company or the industry, USG's long-term earnings power looks
very attractive. The company is a defendant in asbestos lawsuits alleging both
property damage and personal injury. The company's ultimate liability may not be
known for several years, but based on the number of claims filed and settlements
to date, we don't expect that it will be a show stopper. USG Common prices seem
to reflect the potential downside from the asbestos litigation.
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INVESTING IN DEBT SECURITIES OF DISTRESSED COMPANIES
It should be obvious by now that the Fund is not your typical mutual fund that
invests exclusively in REIT common stocks. At the end of the quarter, the Fund
had approximately 9.4% of its net assets invested in debt securities of
companies, most of which we (or others, mistakenly) would consider distressed.
When investing in distressed securities, we invest in the most senior portion of
the capital structure that we expect will participate in the reorganization of
the company (in most cases receive equity in exchange for debt). We protect our
downside by buying cheap enough so that in the event reorganization is not
feasible, liquidation of the company's assets (primarily real estate) will, in
our estimation, still return a substantial profit. We evaluate each investment
in debt securities first by estimating the liquidation value of the real estate,
and then we determine if the company is viable. For example, our investment in
Frank's Notes was based on our determination that the company owned valuable
real estate in good locations. The Fund has little interest in investing in a
nursery retailer (or any retailer for that matter) unless its real estate assets
alone can support our investment. To the extent a distressed company is able to
reorganize, we may be able to enhance our return by receiving either equity or a
performing loan.
RESOURCE CONVERSION UPDATE
Since its inception in September 1998, the Fund has been the beneficiary of a
number of resource conversions. Mortgage REITs have been the most active area in
which we purchased undervalued common stocks of companies that were ripe for
conversion (e.g., Imperial Credit Commercial Mortgage Investment Corp., Chastain
Capital and Amresco Capital Trust). We have also had a couple of very profitable
conversions in non-REITs (e.g., Echelon International and U.S. Home). However,
we expected that several of our investments in the common stocks of small-cap
equity REITs (REITs which own properties as opposed to mortgages) would also
have been converted by now. Our theory was that these REITs, trading at 30% to
40% discounts to net asset value, would be targeted for consolidation by private
funds looking for bargains, or they would go through orderly liquidations.
Unfortunately (or fortunately, depending on your perspective), managements were
reluctant to sell at a discount to net asset value and very few deals got done.
Since the beginning of the year, common stocks of larger REITs have appreciated
substantially more than small-cap REITs. Through July 31, 2000, the Bloomberg
REIT index is up 24.7% versus 16.3% for the Bloomberg Small-Cap REIT index. Many
larger REITs' common stocks now trade at or above net asset value. This means
that, once again, REITs will consider issuing new common stock in the public
market. Alternatively, REITs can issue common stock as currency for acquisitions
of properties, portfolios or other REITs. Small-cap REITs with quality real
estate portfolios like Aegis Realty, Prime Group Realty Trust and Koger Equity
now appear to be prime candidates for stock-for-stock acquisitions. Acquirers
should be motivated to pay a fair price, which would close the gap between
current stock prices and net asset value. The wild card in this theory is always
management and whether they are more motivated to realize shareholder value or
keep their jobs.
Despite the lack of resource conversions in our portfolio of small-cap REITs,
since its inception, the Fund has returned 35.45% through July 31, 2000 and
40.43% through August 25, 2000. Furthermore, it is apparent that the market is
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[THIRD AVENUE FUNDS LOGO]
still significantly undervaluing many of the Fund's investments. If each Fund
holding were priced at our estimate of net asset value, the Fund's net asset
value would increase by 30% to 40%.
I look forward to writing to you again when we publish our annual report for the
fiscal year ending October 31, 2000.
Sincerely,
.
/s/ Michael H. Winer
Michael H. Winer
Co-manager, Third Avenue Real Estate Value Fund
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE REAL ESTATE VALUE FUND
PORTFOLIO OF INVESTMENTS
AT JULY 31, 2000
(UNAUDITED)
PRINCIPAL % OF
AMOUNT ($) ISSUES VALUE NET ASSETS
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONVERTIBLE BONDS - 3.19%
Assisted Living Facilities 1,000,000 CareMatrix Corp. 6.25%, due 8/15/04 $ 247,500 1.20%
--------------
Financial Services 3,500,000 ContiFinancial Corp. 8.38%, due 8/15/03 411,250 1.99%
--------------
TOTAL CONVERTIBLE BONDS
(Cost $647,715) 658,750
--------------
------------------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS - 6.21%
Lawn and Garden Retail 300,600 Frank's Nursery & Crafts, Inc. 10.25%, due 3/1/08 111,222 0.54%
--------------
Real Estate Operating 750,000 Ocwen Asset Investment Corp. 11.50%, due 7/1/05 577,500
Companies 700,000 Rockefeller Center Property Trust
0.00% due 12/31/00 591,500
--------------
1,169,000 5.67%
--------------
TOTAL CONVERTIBLE BONDS
(Cost $1,321,841) 1,280,222
--------------
SHARES
------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS - 84.68%
Building Materials 13,000 USG Corp. 381,875 1.85%
--------------
Home Building 24,500 Centex Corp. 586,469
55,200 D.R. Horton, Inc. 855,600
21,928 Lennar Corp. 526,272
--------------
1,968,341 9.54%
--------------
Natural Resources 11,500 Deltic Timber Corp. 237,906
4,000 The TimberWest Forest Corp. (Canada) 26,923
--------------
264,829 1.28%
--------------
Real Estate Operating 61,100 Avatar Holdings, Inc. (a) (b) 1,283,100
Companies 99,000 Catellus Development Corp. (a) 1,707,750
29,900 Consolidated-Tomoka Land Co. (b) 362,538
30,700 Forest City Enterprises, Inc. Class A (b) 1,055,313
63,300 LNR Property Corp. 1,285,781
39,100 Tejon Ranch Co. (a) 945,731
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE REAL ESTATE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 2000
(UNAUDITED)
% OF
SHARES ISSUES VALUE NET ASSETS
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMON STOCKS (CONTINUED)
Real Estate 46,700 The St. Joe Co. (b) $ 1,389,325
Operating Companies 56,550 Wellsford Real Properties, Inc. (a) 926,006
(continued) --------------
8,955,544 43.42%
--------------
Real Estate Holding Company 25,500 Security Capital Group, Inc. Class B (a) (b) 457,406 2.22%
--------------
Real Estate Investment Trust 52,300 Aegis Realty, Inc. 523,000
69,000 AMRESCO Capital Trust Inc. 711,562
75,500 Anthracite Capital, Inc. 528,500
40,200 Captec Net Lease Realty, Inc. 442,200
150,700 Commercial Assets, Inc. 772,338
22,000 Koger Equity, Inc. 372,625
60,800 Prime Group Realty Trust 946,200
107,700 United Investors Realty Trust 582,253
--------------
4,878,678 23.65%
--------------
Title Insurance 36,000 First American Corp. 560,250 2.72%
--------------
TOTAL COMMON STOCKS
(Cost $15,317,022) 17,466,923
--------------
PRINCIPAL
AMOUNT ($)
------------------------------------------------------------------------------------------------------------------------------------
SHORT TERM INVESTMENTS - 5.97%
Repurchase Agreements 988,869 Bear Stearns 6.57%, due 8/1/00 (c) 988,869 4.80%
--------------
Repurchase Agreements - 7,427 Bear Stearns 3.34%, due 8/1/00 (d) 7,427
Collateral on 234,400 Bear Stearns 6.81%, due 8/1/00 (d) 234,400
Securities Loaned --------------
241,827 1.17%
--------------
TOTAL SHORT TERM INVESTMENTS
(Cost $1,230,696) 1,230,696
--------------
TOTAL INVESTMENT PORTFOLIO - 100.05%
(Cost $18,517,274) 20,636,591
LIABILITIES NET OF --------------
CASH AND OTHER ASSETS - (0.05%) (9,767)
--------------
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[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE TRUST
THIRD AVENUE REAL ESTATE VALUE FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
AT JULY 31, 2000
(UNAUDITED)
VALUE
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS - 100.00% $ 20,626,824
==============
(Applicable to 1,580,442
shares outstanding)
NET ASSET VALUE PER SHARE $13.05
======
</TABLE>
Notes:
(a) Non-income producing securities.
(b) Securities in whole or in part on loan.
(c) Repurchase agreements collateralized by:
U.S. Treasury Strips, par value $2,705,000, matures 11/15/16, market value
$1,010,155.
(d) Repurchase agreements collateralized by:
U.S. Treasury Strips, par value $25,000, matures 11/15/16, market value
$9,336.
U.S. Treasury Strips, par value $645,000, matures 11/15/16, market value
$240,869.
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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
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
[THIRD AVENUE FUNDS LOGO]
THIRD AVENUE FUNDS
767 THIRD AVENUE
NEW YORK, NY 10017-2023
PHONE (212) 888-5222
TOLL FREE (800) 443-1021
FAX (212) 888-6757
www.thirdavenuefunds.com
