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Expensive Fellow Shareholders,
We’re happy to give you the Third Avenue Worldwide Actual Property Worth Fund’s (the “Fund”) report for the quarter ended June 30, 2025. Through the quarter, the Fund generated a return of +15.29% (after charges) in comparison with essentially the most related benchmark, the FTSE/EPRA NAREIT World ex-U.S. Index1 (the “Index”), which returned +15.07% (earlier than charges) for a similar interval.
OBSERVATIONS
The Fund’s +22.18% return thus far this yr has been pushed by a number of key components, together with: (i) underlying share value appreciation of about +14%, together with an +8% constructive influence from the depreciation of the U.S. Greenback, (ii) substantial outperformance within the Fund’s ‘deep worth’ Hong Kong-listed investments, which have returned +39% thus far this yr, forward of the Hong Kong Property Shares index at +21%, and (iii) stable efficiency from among the Fund’s different ‘particular state of affairs’ investments like London-office REIT Helical (+47%) and Spanish-diversified REIT and knowledge center-developer Merlin Properties (+24%).
ACTIVITY
Deep worth investments are described in lots of circles as the kind of worth investing that focuses on firms with safety costs that mirror extreme pessimism or neglect. These investments additionally often contain firms buying and selling at very low valuations, utilizing metrics similar to price-to-net asset worth (“NAV”) and earnings multiples. At Third Avenue, such investments (i.e., these buying and selling at greater than a 30% low cost to conservative estimates of NAV) comprise a considerable portion of the portfolios, however provided that different components are in place. Most significantly, these deep worth holdings additionally require a mix of high-quality property, restricted quantities of debt, and an skilled administration workforce, with prospects for useful resource conversion (or one other catalyst) that might lead the market to acknowledge the discounted worth over time.
Whereas the Fund’s exposures to deep worth investments can fluctuate, they at present signify a few third of the Fund’s property throughout 11 numerous investments. These investments are buying and selling at such steep reductions for varied causes, primarily: (i) a technique of ‘useful resource conversion’ is underway, similar to finishing massive knowledge heart initiatives (SuneVision – Hong Kong, Merlin Properties – Spain) or vital workplace developments (Mandarin Oriental – Hong Kong, Helical – London); (ii) useful resource conversion is mixed with enterprise simplification (Hongkong Land – Pan Asia, Swire Pacific – Hong Kong/China); and (iii) the market has not but priced in a constructive turnaround in cyclical low earnings (Genting – Singapore, Solar Hung Kai – Hong Kong). As every firm progresses via the useful resource conversion course of and cyclical earnings enhance, there may be super upside potential for every of the Fund’s deep worth investments.
Through the quarter, the Fund elevated its publicity to one in all these deep worth holdings by investing in Australian diversified developer and asset supervisor Lendlease Corp Ltd (‘Lendlease’).
Based within the late Nineteen Fifties and listed on the Australian Inventory Trade in 1962, Lendlease established itself as a number one Australian actual property developer and building firm. Nonetheless, Lendlease skilled combined monetary outcomes when increasing into the U.S. within the Seventies and the U.Okay. within the Nineteen Nineties. On reflection, its progress got here with prices, together with varied capital allocation errors, resulting in share value fluctuations through the years. In consequence, at this time, its shares are buying and selling at ranges just like the lows through the World Monetary Disaster in early 2009, or a few quarter of its highs in 2018.
Fund Administration has adopted Lendlease carefully for over 20 years and recollects attending a memorable Lendlease investor day in Sydney in 2004. Notably, the enterprise mannequin was strikingly complicated. It concerned almost all varieties of actual property property—from retail in Asia to navy housing within the U.S.—and stretched the globe from the U.Okay. to Singapore, with income streams starting from asset administration to building. Naturally, this complexity was amplified by a number of layers of senior administration, together with 5 divisional CEOs who introduced that day. On the time, administration proposed introducing much more complexity by internalizing the big Australian REIT (GPT) it managed. Though that try failed, Lendlease continued its intricate enterprise mannequin, increasing varied long-term, mixed-use initiatives within the U.Okay.
Regardless of the complexity and forms, its sturdy Australian enterprise has at all times maintained a aggressive edge in growing extremely worthwhile mixed-use initiatives supported by improved execution and danger administration from its inside building division. Spectacular returns on capital from initiatives like Barangaroo in Sydney’s western central enterprise district may enhance shareholder returns, as proven within the 2018 share value chart above. Given the power of the underlying Australian enterprise, Fund Administration was happy that the board and management have launched into a significant simplification technique. Introduced in Could 2024, the plan contains promoting US$4 billion value of property, decreasing the big overhead construction by US$80 million yearly, and refocusing on its core function as a developer and supervisor of high-quality city initiatives in Australia.
This simplified enterprise is probably going very precious. Based mostly on conservative assumptions, Fund Administration estimates an A$10 internet asset worth per share, considerably greater than the present share value within the low A$5s. Fund Administration believes Lendlease shares can commerce nearer to the estimated A$10 internet asset worth as soon as extra simplification is accomplished, and the earnings profile of the reemerged Australian enterprise turns into clearer.
Thus far, Lendlease has accomplished over half of its simplification course of, together with promoting building divisions within the U.Okay. and U.S., Australian master-planned group initiatives, and joint ventures of its long-term, complicated U.Okay. initiatives with British actual property group Grosvenor Estates. As a part of the asset gross sales, Lendlease has proposed decreasing steadiness sheet leverage and shopping for again as much as 10% of its excellent shares. This roughly US$300 million buyback is predicted to start quickly, following the sale of further non-core property.
With deep worth shares like Lendlease, asset gross sales and buyback actions could be sturdy catalysts for engaging share value positive factors. The Fund skilled this primary in 2023 when Swire Pacific introduced a big buyback after promoting non-core property, and once more this yr when Hongkong Land not too long ago began an aggressive simplification course of. We mentioned that state of affairs in our This autumn 2024 letter. Notably through the quarter, Hongkong Land introduced the sale of an workplace strata3 of their well-liked Central portfolio, with 1 / 4 of the US$800 million sale proceeds getting used for share buybacks. This buyback is being performed at an undervalued value, which considerably boosts shareholder worth, and in Hongkong Land’s case, has helped shares surge over 35% in 2025.
Pivoting to the subject of particular conditions, the Fund’s Q1 2025 funding in Japanese actual property firm Aeon Mall Group (OTCPK:AMLLF) (‘Aeon Mall’) benefited from the affirmation of Aeon Corp’s tender provide at a premium to the share value, enabling the Fund to realize a comparatively fast 17% return on funding. Regardless of Aeon Mall being acquired at a big low cost to the underlying actual property worth, Fund Administration was happy with the result as a result of low danger and quick return on capital. This funding provides to the Fund’s profitable observe document in ‘useful resource conversion’ occasions, together with mergers, privatizations, spin-offs, and recapitalizations. On common, these investments have generated annualized returns exceeding 40%, as proven within the following desk, and have been a significant contributor to the Fund’s extra returns.4
Transactions like Aeon Mall reveal inefficiencies that Fund Administration typically encounters in public actual property markets throughout M&A exercise outdoors the U.S. One other instance is a latest privatization provide from ‘Ki’ (a three way partnership with the controlling shareholder, U.S. self-storage REIT, Public Storage (PSA)) to denationalise Australian self-storage REIT Abacus Storage King (OTCPK:ABCGF) (‘Abacus Storage’). Abacus Storage owns and manages a portfolio of 147 self-storage services throughout Australia and New Zealand, together with many property in city Sydney and Melbourne which might be arduous to duplicate. Ki’s provide was made at a 15% low cost to the revised e book worth and at a fair bigger low cost than what the portfolio and working enterprise would possible fetch in an arm’s-length open market sale. The management group of the Fund’s funding in Nationwide Storage (NSA) REIT (OTC:NTSGF) Australia (‘Nationwide Storage’) seems to agree, having acquired over 9% of Abacus Storage because the Ki announcement. Through the quarter, the Fund redirected proceeds from Aeon Mall to spend money on Abacus Storage. Fund Administration believes it’s extremely possible that Abacus Storage will both obtain a revised bid from Ki close to our estimated internet asset worth, or that Nationwide Storage will suggest a extra affordable value to merge the portfolio whereas divesting some property to appease competitors authorities.
After incorporating this quarter’s exercise, the Fund’s geographic exposures stay numerous, and as evidenced within the above chart, the Fund diminished publicity to Japan and elevated publicity to Australia.
Relating to asset sorts, 64% of the Fund’s capital is invested in residential, industrial, logistics, and self-storage actual property property. Moreover, publicity to conventional industrial actual property classes like retail and workplace makes up solely 20% of the Fund, considerably lower than a related index exposures close to 50%. Additionally setting the Fund aside are the specialised actual property property similar to lodging, scholar housing, and knowledge facilities account for 16% of the portfolio.
Given the Fund’s publicity to firms centered on particular person property sorts in choose geographic markets, its holdings are typically extra centered and sometimes characterised as small- and mid-market-cap firms, as illustrated beneath.
FUND COMMENTARY
The present surroundings reminds Fund Administration of the early 2000s when a mix of discounted valuations for worldwide listed actual property (low P/Es and reductions to NAV), a number of years of expertise sector outperformance, and an absence of recent actual property provide led to an eventual regime change in fairness markets. This shift induced worldwide actual property to outperform international equities by about 10% yearly for a decade.
Nonetheless, no two time intervals are the identical. A notable instance is the deterioration within the U.S.’s internet worldwide funding place (‘NIIP’) which measures the distinction between U.S.-owned property overseas and foreign-owned property within the U.S. A damaging NIIP signifies that the U.S. owes extra to the remainder of the world than it owns overseas. Whereas the U.S. NIIP was solely about 15% of U.S. GDP in 2000, it has grown to roughly 85% at this time.
At this time’s U.S. twin deficits (the fiscal and present account deficits) —have had a big and lasting hostile impact on the U.S.’s NIIP. Consequently, the buildup of overseas claims on U.S. property has made U.S. property rather more susceptible to shifts in overseas investor sentiment and capital flows than they have been a long time earlier.
On this regard, Fund Administration has noticed elevated nationalist funding tendencies amongst a number of overseas sovereign wealth funds, together with preliminary indicators of regulatory modifications that might favor extra home (non-U.S.) investments. This was additionally evident with not too long ago introduced reforms to the U.Okay. pension system, the place the U.Okay. authorities appears to be transferring towards setting extra binding asset allocation targets to encourage native funding.
This more and more nationalist funding surroundings can be starting to present itself in Hong Kong, the place China’s State-Owned Enterprises (SOEs) are pouring massive monetary assets into Hong Kong’s capital markets, strengthening its function as China’s worldwide monetary heart. Whereas is is tough to estimate, the southbound hyperlink, which permits Chinese language traders to purchase Hong Kong shares, has induced Mainland possession to rise from about 5% of the Hong Kong inventory market in 2020 to round 15% in 2025. Mainland traders now account for a good portion of the buying and selling quantity. Though there was no specific coverage or clear development, a few of China’s massive present account surplus is probably going discovering its approach into Hong Kong shares. A rebound within the Cling Seng Index (HSI) and mainland help for Hong Kong as an inventory hub have created a considerable pipeline of potential inventory market listings.
We observe that greater than 200 preliminary public choices are deliberate, primarily from new firms on the mainland or Chinese language companies aiming for twin listings. Hong Kong’s place as a significant Asian monetary hub thus appears set to develop, supported by Hong Kong’s internationally aligned, widespread law-based authorized system, with no capital controls, a easy, low-tax system, massive and liquid capital markets, and a deep expertise pool. Importantly, the mainland not too long ago confirmed an indefinite continuation of the one nation, two techniques precept.6
Though financial situations, together with actual property fundamentals, have been weak in Hong Kong because the COVID pandemic, there are indicators of enchancment in underlying actual property fundamentals. This development is predicted to proceed because the surge in capital market exercise spreads all through Hong Kong’s financial system, creating a strong multiplier impact throughout the town’s inhabitants of seven.5 million.
The Fund is positioned to learn from Hong Kong’s elevated capital market exercise by investing in workplace, retail, and residential property, accounting for 9% of the Fund’s publicity and a 3% publicity to the main datacenter firm (SUNeVision). Regardless of spectacular share value returns this yr, the Fund’s Hong Kong publicity trades at very engaging ranges, together with an 12x P/E a number of and at simply 54% of internet asset worth, not removed from historic low valuation reductions.
With U.S. asset valuations seemingly extra susceptible to modifications in overseas investor sentiment and capital flows, fairness markets like Hong Kong can provide U.S.-based traders an uncorrelated return alternative. That is supported by totally different capital circulation dynamics, enhancing native fundamentals, and fascinating valuation reductions. Many such situations exist throughout the Fund’s numerous geographic exposures.
With this in thoughts, Fund Administration stays constructive on the outlook for the Fund. We thanks to your continued help and stay up for writing to you once more subsequent quarter. Within the meantime, please don’t hesitate to contact us with any questions or feedback at realestate@thirdave.com.
Sincerely,
The Third Avenue Actual Property Worth Group
Quentin Velleley, CFA Portfolio Supervisor
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Worldwide Actual Property Worth Fund Q225  IMPORTANT INFORMATION This publication doesn’t represent a proposal or solicitation of any transaction in any securities. Any suggestion contained herein might not be appropriate for all traders. Info contained on this publication has been obtained from sources we imagine to be dependable, however can’t be assured. The knowledge on this portfolio supervisor letter represents the opinions of the portfolio supervisor(s) and isn’t supposed to be a forecast of future occasions, a assure of future outcomes or funding recommendation. Views expressed are these of the portfolio supervisor(s) and should differ from these of different portfolio managers or of the agency as an entire. Additionally, please notice that any dialogue of the Fund’s holdings, the Fund’s efficiency, and the portfolio supervisor(s) views are as of June 30, 2025 (besides as in any other case acknowledged), and are topic to vary with out discover. Sure data contained on this letter constitutes “forward-looking statements,” which could be recognized by means of forward-looking terminology similar to “might,” “will,” “ought to,” “count on,” “anticipate,” “undertaking,” “estimate,” “intend,” “proceed” or “imagine,” or the negatives thereof (similar to “might not,” “shouldn’t,” “are usually not anticipated to,” and many others.) or different variations thereon or comparable terminology. On account of varied dangers and uncertainties, precise occasions or outcomes or the precise efficiency of any fund might differ materially from these mirrored or contemplated in any such forward-looking assertion. Present efficiency outcomes could also be decrease or greater than efficiency numbers quoted in sure letters to shareholders. Date of first use of portfolio supervisor commentary: July 17, 2025 FUND RISKS: Along with basic market situations, the worth of the Fund shall be affected by the power of the actual property markets. Elements that might have an effect on the worth of the Fund’s holdings embrace the next: overbuilding and elevated competitors, will increase in property taxes and working bills, declines within the worth of actual property, lack of availability of fairness and debt financing to refinance maturing debt, vacancies resulting from financial situations and tenant bankruptcies, losses resulting from prices ensuing from environmental contamination and its associated clean-up, modifications in rates of interest, modifications in zoning legal guidelines, casualty or condemnation losses, variations in rental revenue, modifications in neighborhood values, and practical obsolescence and attraction of properties to tenants. The Adviser’s use of its ESG framework may trigger it to carry out in a different way in comparison with funds that should not have such a coverage. The standards associated to this ESG framework might consequence within the Fund’s forgoing alternatives to purchase sure securities when it would in any other case be advantageous to take action, or promoting securities for ESG causes when it may be in any other case disadvantageous for it to take action. For a full disclosure of principal funding dangers, please check with the Fund’s Prospectus. 1 FTSE EPRA/NAREIT World ex US Index is designed to trace the efficiency of listed actual property firms and Actual Property Funding Trusts in each developed and rising markets. By making the index constituents free-float adjusted, liquidity, dimension and income screened, the sequence is appropriate to be used as the idea for funding merchandise, similar to derivatives and Trade Traded Funds (ETFs). It isn’t doable to take a position straight in an index. 2 Extra Return refers back to the return from an funding above the benchmark. Supply: Investopedia 3 Workplace strata refers back to the possession construction the place totally different events can personal particular person workplace flooring, not like a single proprietor controlling all the constructing. 4 Calculated utilizing inside price of return 5 Small Cap is Fairness Market Cap as much as US$2bn, Mid Cap US$2bn-US$10bn, Giant Cap >US$10bn. 6 The “one nation, two techniques” precept, as utilized to Hong Kong, signifies that whereas Hong Kong is a part of China, it retains its personal capitalist financial system, authorized system (primarily based on widespread regulation), and lifestyle, distinct from mainland China’s socialist system, for a interval of fifty years (from 1997). This contains sustaining its personal foreign money, customs territory, and a excessive diploma of autonomy in most areas aside from protection and overseas affairs. Latest commentary from Mainland officers suggests this method shall be prolonged ‘indefinitely’. For the Third Avenue Glossary please go to right here.  Previous efficiency isn’t any assure of future outcomes; returns embrace reinvestment of all distributions. The chart represents previous efficiency and present efficiency could also be decrease or greater than efficiency quoted above. Funding return and principal worth fluctuate in order that an investor’s shares, when redeemed, could also be value kind of than the unique price. For the latest month-end efficiency, please go to the Fund’s web site at www.thirdave.com. The gross expense ratio for the Fund’s Institutional and Z share lessons is 1.54% and 1.48%, respectively, as of March 1, 2025. Distributions and yields are topic to vary and are usually not assured. The fund’s funding aims, dangers, prices, and bills should be thought-about rigorously earlier than investing. The prospectus incorporates this and different vital details about the funding firm, and it could be obtained by calling 800-443-1021 or visiting www.thirdave.com. Learn it rigorously earlier than investing. Distributor of Third Avenue Funds: Foreside Fund Providers, LLC. Third Avenue provides a number of funding options with distinctive exposures and return profiles. Our core methods are at present obtainable via ’40Act mutual funds and customised accounts. If you need additional data, please contact a Relationship Supervisor |
Editor’s Be aware: The abstract bullets for this text have been chosen by Looking for Alpha editors.
Editor’s Be aware: This text discusses a number of securities that don’t commerce on a significant U.S. change. Please concentrate on the dangers related to these shares.