Third Avenue Management, an investment management firm, published its “Real Estate Value Fund” second quarter 2021 investor letter – a copy of which can be downloaded here. A portfolio return of +17.71% was recorded by the fund for the second half of 2021, below the FTSE EPRA NAREIT Developed Index that delivered a 16.11% gains for the same period. You can view the fund’s top 5 holdings to have an idea about their top bets for 2021.
In the Q2 2021 investor letter of Third Avenue Management, the fund mentioned Stratus Properties Inc. (NASDAQ: STRS), and discussed its stance on the firm. Stratus Properties Inc. is an Austin, Texas,-based residential property managers company, that currently has a $239.6 million market capitalization. STRS delivered a 14.12% return since the beginning of the year, extending its 12-month returns to 59.63%. The stock closed at $29.10 per share on July 22, 2021.
Here is what Third Avenue Management has to say about Stratus Properties Inc. in its Q2 2021 investor letter:
“A portion of the proceeds from St. Modwen were utilized to establish a position in the common stock of Stratus Properties Inc. (“Stratus”). This U.S.-based real estate operating company was spun-out of Freeport McMoran, Inc. in the early 1990’s and subsequently sold its oil and gas assets to primarily focus on unlocking value from its extensive land holdings in Austin, Texas.
Since that transformation, Stratus has (i) built out a diversified portfolio of income-producing properties with more than 600,000 square feet of primarily grocery-anchored retail centers and 1,000 multifamily units in central Texas, (ii) undertaken the development of residential-led master planned communities including the sale of more than 4,000 lots in its Barton Creek and Circle C projects in the Austin area, and (iii) delivered a prominent mixed-use location in downtown Austin anchored by the 251-room W Hotel and 3,000-plus seat Austin City Limit (ACL) Live Amphitheatre known as “Block 21.”
Stratus was, however, undoubtedly hard hit by measures taken to stem the spread of the Covid-19 pandemic, including “stayat-home” orders and restrictions on travel and live events. Not only did this lead to a meaningful reduction in the company’s revenues in the ensuing period, but its previous agreement to sell Block 21 to Ryman Hospitality, Inc. for $275 million in gross proceeds fell through. As a result, Stratus has been required to utilize Ryman’s forfeited purchase deposit (as well as other cash proceeds) to cover lost hotel revenues and foregone tickets sales at Block 21 in recent quarters.
Having managed through this challenging period, Stratus has reported substantial progress in recent months. Most notably, the company has sold its Saint Mary multi-family complex thus stabilizing its liquidity profile, received planning permissions for the final phase of its acclaimed Barton Creek
project, and reported an uptick in activity at Block 21. Despite these improvements, the price of Stratus common stock has remained well below pre-pandemic levels, granting the Fund the opportunity to initiate a position at a significant discount to the company’s published NAV estimate—which could be viewed as a conservative figure when considering the recently announced plans at the Holden Hills phase of Barton Creek are yet to be factored in. It is also Fund Management’s view that the discount could narrow with a further improvement in fundamentals and potential resource conversion activities
(e.g., selling Block 21 to a live-event operator and converting to a REIT following anticipated land sales).With this addition, the Third Avenue Real Estate Value Fund seems to have a distinctive exposure in listed real estate with investments in some of the largest residential land owners and homebuilders in Austin, TX through Stratus Properties, Brookfield Homes (a subsidiary of Brookfield Asset Management), and Lennar Corp. As our on-the-ground due-diligence efforts support, all three entities seem well-placed to capitalize on the need for more housing in this metropolitan area given the outsized population growth (more than 140 people moved to Austin, TX per day last year) and
anticipated job growth stemming from corporate investment and relocations (e.g., Tesla’s “Gigafactory”, Apple’s “HQ-2”, a potential Samsung chip factory, Oracle’s relocation, expanding venture capital, et al).”
Photo by Breno Assis on Unsplash
Based on our calculations, Stratus Properties Inc. (NASDAQ: STRS) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. STRS was in 3 hedge fund portfolios at the end of the first quarter of 2021. Stratus Properties Inc. (NASDAQ: STRS) delivered a -18.05% return in the past 3 months.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
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Disclosure: None. This article is originally published at Insider Monkey.
