At ValueWalk we have discussed Third Avenue, a fantastic value oriented firm, with a distressed fund. What many people don’t know though, is that Third Avenue also has a special situations fund for accredited investors called Third Avenue Special Situations Fund. While we will not post the entire letter, below are some insightful segments from Third Avenue Special Situations Fund Letter Q4.
Third Avenue Special Situations Fund Letter – top performers
Standout drivers of positive performance for 2013 include: BMC Equity and Second Lien Debt, Newhall Land, GM, Aveos Second Lien Debt, a litigation claim, our high dividend event-drivenbasket, FNMA preferreds, Conifex Timber, Bank of Ireland preferreds, a basket of TARP bank warrants and Par Petroleum. The only significant detractor was Desarrolladora Homex S.A.B. De C.C. (“Homex”).
Third Avenue Special Situations Fund Letter on Fed
Our strong 2013 performance was fairly spread out throughout the year and the Fund performed well even during the volatile months after the U.S. Federal Reserve spooked the markets with regards to tapering. This is the result of our event-driven strategy. The idiosyncratic events that affect our portfolio companies have resulted in limited correlation to broader indices. Focusing on our key contributors, we can point to events that have impacted every single one of them.
Third Avenue Special Situations Fund Letter on each position
•BMC Select benefited from an expected refinancing, as maturity of our Second Lien debt was approaching, as well as continued improvement in home starts (and permitting). In fact, we have realized approximately 99% of our BMC positions just prior to entering 2014. This consisted of a full realization on our pre-petition line of credit, Second Lien debt position and the vast portion of our common stock. The stronger demand for new home starts is driven by the lack of supply provided over the last six years. As a result, demand is stronger than supply in many regions resulting in strong home price appreciation.
•As to the Fund’s Newhall Land position, strong demand, limited supply and successful navigation of the permitting process has led to self-sustaining cash flow generation and strong gains.
•GM benefited fundamentally from the continued improvement in auto sales toward, and possibly beyond, normalized levels. Annualized U.S. auto sales have appreciated 80% from 2009 trough levels and are only 9% below the highs reached in 2005. GM also benefited during late 2013 as the U.S. government fully monetized its ownership position. and GM announced investments in both people and plants. We have realized a material portion of the appreciation.
The liquidation of Aveos continued which resulted in several cash payments during the year that have driven strong returns for the position in 2013 after its being a significant detractor for certain prior periods.
•We estimated our private litigation claim investment would involve a three month long event. We fully realized our return in four months as settlements were reached.
Third Avenue Special Situations Fund Letter – dividend basket
•The largest position of our high dividend event basket is Weyerhaeuser Co., which was quite active during the year including the announcement of the monetization of their homebuilding division to TRI Pointe Homes Inc. Management remains equally focused on cost savings and the realization of fair value on its wood products division which should lead to further value enhancing events during 2014.
•FNMA catalysts were a little softer, but nonetheless lawsuits were filed to stop the dissolution of the company and restructuring plans were detailed. We still expect more positive events during 2014.
•Conifex Timber completed most of its capital expenditure plan which allowed the Company to generate much stronger results in its wood segment in line with other first/second quartile mills. Additionally, the Company secured financing for its biomass project which eliminates perhaps the biggest unknown associated with future earnings.
Third Avenue Special Situations Fund Letter – IRE
•Bank of Ireland continued its march toward correcting the issues that plagued the country and its banks. During December, the Bank remarketed the Government owned preferred, which was due to increase 25% in principal amount at the end of March 2014, thereby eliminating any potential increase in debt.
•Our basket of TARP warrants on banks are positioned to significantly benefit from improving net interest margins which would seemingly occur as continued Fed tapering takes effect, especially with an upward sloping interest rate curve which we expect as they continue to hold short term rates low.
•Par Petroleum completed the acquisition of Tesoro’s Hawaii refinery and retail operations and has benefited from rising natural gas prices.
Third Avenue Special Situations Fund Letter – Longview
We remain involved in Longview (a name we discussed last quarter), both the first lien debt as adebt-for-equity restructuring opportunity and the Debtor-In-Possession (DIP) facility which is a distressed performing credit play. For most of the Country, natural gas input facilities are the marginal producer of electricity meaning that electricity prices are set based on the price of natural gas. Huge shale-related findings have depressed natural gas prices and negatively impacted all power produces. Longview, and other independent power producers, should now benefit as natural gas prices have risen to $4.23 / MMBtu from lows of under $2 less than two years ago. Par Petroleum is another holding that has half of its NAV tied to natural gas as it has an interest in relatively low cost Colorado natural gas reserves.
Third Avenue Special Situations Fund Letter – Puerto Rico
Mining companies are under tremendous pressure. While gold seems to get the headlines, there may be equal, and perhaps more attractive opportunities, in other metals both precious and base. We have recently begun researching opportunities there and are also looking at prospects in emerging markets and in troubled municipal offerings such as Puerto Rico bonds.