THIRD AVENUE REAL ESTATE VALUE FUND Portfolio Manager Commentary INSTITUTIONAL: TAREX | INVESTOR: TVRVX | Z: TARZX September 30, 2019 Jason Wolf, CFA | Portfolio Managers Ryan Dobratz, CFA | Portfolio Managers Dear Fellow Shareholders: $100,000 in the Third Avenue Real Estate Value Fund We are pleased to provide you with the Third Avenue would have a market value of nearly $700,000 as of Real Estate Value Fund’s (the “Fund”) report for the September, 30 2019 (assuming distributions had been quarter ended September 30, 2019. Through the first reinvested), or approximately 60% more than the same nine months of the year, the Fund generated a return of $100,000 would be worth had it been placed into a +12.74% (after fees) versus +20.44% (before fees) for passive fund tracking the S&P 500 and held over the the Fund’s most relevant benchmark, the FTSE EPRA same time period. 1 NAREIT Developed Index . Value of $100K Since September 19982 As of September 30, 2019 As the Fund enters its twenty-first year of operations, $900 $800 the absolute performance has remained above its 900 long-term average so far this year. It has, however, 800$700 700$600 trailed the aforementioned index on a relative basis 600$500 year-to-date. This variance is largely due to the Fund 500$400 400 $300 having greater exposure to real estate operating 300 $200 200 $100 companies (which tend to retain capital and self- 100 finance the expansion of their enterprises) as opposed 0 $0 to real estate investment trusts (that distribute the vast 9/30/989/1/98 6/1/999/30/99 3/1/00 9/30/00 9/30/019/1/01 9/30/026/1/02 3/1/03 9/30/03 9/30/049/1/04 9/30/056/1/05 9/30/063/1/06 9/30/079/1/07 9/30/086/1/08 9/30/093/1/09 9/30/10 9/1/10 9/30/116/1/11 9/30/123/1/12 9/30/13 9/1/139/30/14 6/1/14 9/30/153/1/15 9/30/16 9/30/179/1/16 6/1/17 9/30/183/1/18 9/30/19 12/1/00 12/1/03 12/1/06 12/1/09 12/1/12 12/1/15 12/1/18 majority of their cash flow as dividends and are largely TAREXTA RE X NAREIS&P 500 T S&PNAREIT 50 0 reliant upon the capital markets to finance investment). Fund Activity While real estate investment trusts, or “REITs”, tend to outperform in periods of declining interest rates given In a quarter when WeWork’s attempted Initial their dividend appeal (e.g., 2019), Fund Management Public Offering captivated the attention of most remains mindful of the prevailing valuations for these industry participants, Fund Management found more more interest-rate sensitive securities when viewed pragmatic opportunities elsewhere. Of particular with a longer-term perspective in mind. For instance, relevance, the Fund initiated a position in the US-based REITs are currently priced at more than 25 common stocks of two companies that have recently times free cash flow – a level that has seldom been completed “bolt-on” acquisitions with significant reached previously. As a result, Fund Management strategic merit, thereby creating a unique path for remains cautious of these more widely-held real estate value creation in the years ahead (Colony Capital and securities, instead electing to concentrate around a Grainger plc). The Fund also capitalized on volatility select set of holdings that seem to be priced at much in Asia to enhance its positioning within Singapore more conservative valuations within a historical and Hong Kong. This was primarily accomplished by context—both within the US and overseas. adding the common stock of a company that controls one of the premier portfolios in those high-barrier-to- Recognizing that performance can fluctuate from entry markets (HongKong Land). quarter to quarter, Fund Management believes that its long-term results are a more relevant measure of Colony Capital (“Colony”) is a US-based REIT that was performance. To wit, since the Fund’s inception in founded by Tom Barrack in 1991 as a value-oriented September 1998, it has earned an annualized return investment firm to capitalize on real estate-related of +9.68%. As highlighted in the following chart, opportunities emanating out of the savings-and-loan this performance indicates an initial investment of crisis. After early success, the company expanded 1 The FTSE EPRA/NAREIT Developed Real Estate Index was developed by the European Public Real Estate Association (EPRA), a common interest group aiming to promote, develop and represent the European public real estate sector, and the North American Association of Real Estate Investment Trusts (NAREIT), the representative voice of the US REIT industry. The index series is designed to reflect the stock performance of companies engaged in specific aspects of the North American, European and Asian Real Estate markets. The Index is capitalization-weighted.Please see Appendix for performance table and information. 2 Hypothetical investment since Fund inception Sept 17,1998. Third Avenue Real Estate Value Fund | As of September 30, 2019 1 its platform to take advantage of other dislocations assets are currently comprised of 4,900 market- globally, seizing on contrarian opportunities in rate rental units that are approximately 98% leased Europe and Asia in the 1990’s and 2000’s, as well as and primarily concentrated in the London area and in the US residential markets within the past decade. Southeast England, as well as a portfolio of nearly As a result, Colony is one of the largest real estate 3,000 rent-regulated units (that have been acquired investment firms today with more than $40 billion of over the company’s long-history and are essentially assets under management—primarily comprised of fully-occupied). a diversified set of holdings including industrial real estate, healthcare properties, hotels, data centers, In addition, Grainger was selected by the Transport credit, and certain energy investments. for London (“TfL”) as its joint-venture partner to oversee the build-out of more than 3,000 PRS While the company has an enviable longer-term track units on seven underutilized sites adjacent to TfL record, Colony has spent the past few years working stations in the London area. After factoring in through a challenging period following its tri-party these units (where Grainger will have a 51% stake merger with Northstar Realty and Northstar Asset in the projects), alongside its late-2018 acquisition Management in 2017. The repositioning process of the “GRIP” portfolio, Grainger has assembled a following this combination gathered speed over the development pipeline that can accommodate more past year with Barrack returning to the CEO role in than 8,000 additional PRS units at its pro-rata share. 2018. Since that time, Colony has accelerated the disposition of non-core assets, reduced debt levels, cut While Grainger common is currently trading at a excess overhead, and made strategic investments in discount to a conservative estimate of NAV amidst new platforms including the recent acquisition of Digital the ambiguity of “Brexit”, it is Fund Management’s Bridge—a well-respected investment firm run by Marc view that the company is well-capitalized (i.e., a loan- Ganzi, that is focused on digital real estate assets such to-value ratio below 40% with substantial retained as data centers, cell towers, and fiber networks. earnings) and positioned to withstand any reasonable worst case market dislocations that could result from Through the combination of these initiatives, as well a UK-EU split. Further, it seems likely that Grainger as the $1.4 billion of expected proceeds from its will be able to increase its NAV over the next three anticipated dispositions of its industrial real estate to five years as it (i) boosts rents at its PRS assets portfolio and publicly-listed European investment given modest in-place rates, (ii) recaptures 6-7% platform, Colony will have (i) vastly enhanced its of its regulated units per year which can be sold financial position with a net-debt-to-asset ratio below (or re-leased) at market rates, and (iii) undertakes 40% (that is primarily comprised of non-recourse measured, but profitable, development activity property specific debt) and (ii) largely refocused itself that could add more than 500 units per year to the as one of the leading investment platforms within the company’s portfolio. Should such a scenario occur rapidly growing niche of digital real estate. As a result, and not serve to improve the existing valuation, it it is Fund Management’ view that these efforts should is not inconceivable that a strategic buyer would serve to close the discount that Colony common pay a premium for Grainger’s platform given the currently trades at relative to conservative estimates institutional interest in PRS and opportunity to of its Net-Asset Value (“NAV”) and potentially position further consolidate the sector (only 3% of UK rental the company to increase its NAV at a low double-digit properties are institutionally owned). rate by further scaling its leading position in the digital real estate space over time. The Fund also reduced its exposure to Hong Kong- based investments during the quarter. For more than Grainger plc (“Grainger”) is a UK-based real estate a decade, the Fund has held significant investments operating company that controls one of the largest in a select set of Hong Kong-based real estate residential-rental portfolios in the country. Having operating companies with the view that these issuers been publicly-listed since 1983, Grainger has represent amongst the best opportunities for long- undertaken a significant strategic transformation term value investors in real estate securities—or after Helen Gordon was appointed CEO in 2015.