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By Josh Charlson, CFA | 06-12-2013 01:00 PM

Real Estate Recovery Still Has Room to Build

Growth for timber companies, land-development businesses, and retailers still has ways to go as the real estate recovery matures, says Third Avenue manager Jason Wolf.

Josh Charlson: Hi, I am Josh Charlson with Morningstar. I am here at the Morningstar Investment Conference with Jason Wolf. He is a co-lead portfolio manager for Third Avenue Real Estate Value, and we're going to be talking about real estate today. The real estate markets have been on a tear over the past 18 months, and this fund has been one of the best. It was up 36% in 2012, and through May of this year it was in the top 2% of the global real estate category. Welcome, Jason.

Jason Wolf: Thanks, Josh.

Charlson: Most real estate mutual funds focus on REITs, and your fund takes a little bit of a different approach. It focuses more on real estate operating companies. Tell us a little bit about why you take that approach and how it's affected the fund's performance over the past 18 months or so?

Wolf: Yeah. Well, the fund been around for 15 years, and we've always taken a value-oriented approach, similar to the Third Avenue Investment philosophy that Marty Whitman created years ago. And REOCs have always been the preference for our style. And primarily, the reason for this is because REOCs can retain cash flow where real estate investment trusts are required by law to distribute most of their cash flow. And by retaining cash flow, we feel like the REOC model allows businesses to be able to grow through developments and other avenues to create long-term wealth.

Charlson: So one of the areas that's done very well for the fund over the past year and a half or so is sort of the U.S. residential market where you've made a play through various types of holdings. What have some of your investments been in that area?

Wolf: Yeah. Back in 2010, Josh, we invested in a range of real estate in the U.S. and the U.K. residential market really right down the vertical stack, from retailers to homebuilders to timber companies and land-development companies back in the downturn. And the view was that we were going to invest in these businesses that were very well-financed without any kind of prospects for the timing of the recovery. But when the recovery did occur, we've felt like these businesses would prosper. And sure enough, here that we're starting to see some semblance of a recovery in the housing businesses, these businesses tend to lead. The homebuilders obviously led prior to some of the inputs, but we still feel like the inputs, such as the timber companies, the land-development businesses, and the retailers, still have ways to go as the recovery matures.

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