Winer: Debt the Best Way to Play U.S. Real Estate Market

And we looked at it as a return or an expected yield to maturity or yield to put. We were buying these notes at 50 percent discounts to par with 25 percent, 30 percent, or better yields to maturity, and there no other buyers for this paper.

Our view was we're buying into companies that we know. We're buying U.S. REITs and real estate operating companies. And even if the company was to go bankrupt, which we didn't believe that they would, the asset values more than covered the debt.

So, our downside scenario was we end up having a longer-term investment, but ultimately we get out at par. And when you're buying at 50 cents on the dollar, you're doing pretty well. But, those we expected to be performing loans.

In addition to that, last year, we bought over $100 million of senior secured bank debt in a company called LandSource, which owns Newhall Ranch, 20,000-plus lots, 30 miles north of Los Angeles. This was a company that had a billion and a half dollars of debt two years ago.

It went into bankruptcy in June of 2008, and we were buying the senior paper at a big discount to par value. We took the company through bankruptcy. We get on the steering committee; we're one of the large creditors in the company. We brought the company through bankruptcy; we drove the plan of reorganization.

Now the company came out of bankruptcy, it's called Newhall Land Development. We own about 10 percent of the common equity in this company, and it has zero debt and over $100 million in cash on the balance sheet.

So, there are two ways to play debt. You can get into the distressed arena and go through the restructuring process, or you can buy deeply discounted debt that you think is going to remain a performing loan. But, you have to be prepared to roll up your sleeves and go through a restructuring process should the loan end up being in default.

So, we can play both ways. We know the bankruptcy process. We love it, we like to get our hands dirty, and it's something that we've been doing for a long time at Third Avenue. And we think there will be more opportunities in the U.S. to get involved in distressed real estate investing.

We're very light on equities in the U.S. today. The lowest percentage of our portfolio ever is invested in stocks in U.S. real estate companies. And we think the best way to play this market today is to, first of all, be very cautious, and second of all, through opportunities to invest in debt, that may be the best place to go.

So, we can invest anywhere in the capital structure where we think we're going to get the best risk-adjusted returns.

Stipp: Certainly, some great ideas and some very interesting opportunities. Thanks so much for you time, Michael Winer, Third Avenue Real Estate Value Fund.

I'm Jason Stipp for Morningstar, and thanks for watching.