Third Avenue's Jason Wolf Talks Hong Kong Real Estate

Third Avenue Value TAVFX and Third Avenue Real Estate Value TAREX both maintain large commitments to a handful of Hong Kong real estate companies. The management teams on both funds discuss them regularly in their quarterly shareholder letters, including their most recent submissions, but with exposures of more than 40% of assets and about 20% of assets, respectively, questions about them abound. At the recent 2011 Morningstar Investment Conference in Chicago, I caught up with Jason Wolf, who comanages the real estate fund and is also the firm's resident expert on Hong Kong real estate companies.

Q. When it comes to investing, Third Avenue's mantra is "safe and cheap." What makes its Hong Kong real estate investments safe?

A. Certainly, these companies have all exhibited financial strength through our investment horizon. The second element of safety is a strong and experienced management team that is incentivized through either stock ownership or stock options, and one that has historically been a quality steward of capital for shareholders. When you look at the aspects of Cheung Kong, Henderson Land, Wheelock, Hang Lung--they're all led essentially by rags-to-riches-type guys that have built these businesses over a period of going on 40 years. We get comfortable because so much of their financial net worth is tied up into these businesses and they have grown them for such a long period of time that they offer fantastic financial disclosures, which is the third element of "safe" in being able to analyze a company through the public filings that a company provides.

Q. So, they meet the "safe" criteria. But considering the recent headlines of fraud among Chinese companies, is there any level of skepticism, even for companies like this, when you are looking at those financials?

A. There's never a guarantee that there's not a fraudulent situation. What we hold in high regard is the substantial ownership stake that these guys have in these businesses, unlike some of the businesses that you're referring to, some of which have been reverse takeovers of shell companies that are relatively new to the capital markets. [Our] companies not only essentially founded the Hong Kong stock exchange, but these management teams are also part of the development of the capital markets in Hong Kong.

Q. Separately from any sort of fraudulent activities, can you speak to what kind of skepticism you put to these companies' publicly available [net asset values] and how reliable you think that they are, because there is some level of subjectivity when appraising real estate.

A. International accounting standards allow these companies to hire external appraisers to value their income-producing portfolios, and increasingly over the next year and a half, they will expand that into some of their development properties that are more than 50% complete.

At Third Avenue, what we do is use those numbers as a starting point, try to understand where the appraisers are in their assumptions being made for the real estate, and then do our own research to determine what we feel like certain aspects of the businesses are. The complication in Hong Kong is that many of the businesses have three or more operating segments and the accounting for each may vary.