In its most recent update for investors, managers of The Third Avenue Fund [TAVFX] the fund disclosed some purchases that it likely regrets at this point:
During the latter part of July, there developed a stock market panic as it relates to businesses involved with residential sub prime mortgages, home building, real estate development, and pending Leveraged Buy Outs (“LBO’s”).
The Fund bought heavily into this chaotic situation by acquiring the common stocks of very strongly financed companies where the common stocks were selling at meaningful discounts from our estimates of NAVs. Such acquisitions of common stocks were Forest City (NYSE:FCE.A), MBIA (NYSE:MBI), Nuveen (JNC), Radian (NYSE:RDN) and USG (NYSE:USG).
Forest City probably was acquired at prices that represent a considerably smaller discount from NAV than is the case for MBIA, Radian, and USG. Forest City, an investment builder developing complex urban projects, however, has so many promising projects in its pipeline that the odds seem pretty good that Forest City, over the next five years, has the potential to substantially increase NAV.
Nuveen Common is an interesting arbitrage. Nuveen shareholders are scheduled to receive before 2007 year-end $65 per share in cash (after a $0.24 dividend has been paid) in an LBO. It seems as if the transaction has at least a 90% probability of closing by year-end. If so, the Internal Rate of Return (“IRR”) on the Fund’s investment made during the quarter will exceed a 15% annualized rate. Investing in Nuveen Common seemed a good use of TAVF’s surplus cash.
Forest City, MBIA, Nuveen and Radian seem to be so well financed that they can survive and prosper without needing near-term (say 2007 and 2008) access to capital markets for new funds. Capital markets may continue to be relatively chaotic.