Third Avenue Management’s Martin Whitman is a well-known value investor with five funds under the Third Avenue flag. This quarter, the focus seems to have been on real estate with a couple attractive opportunities in that space comprising top holdings. Below are his top three holdings.
Posco (NYSE: PKX) With weakness in the Korean won and domestic price hikes, PKX appears well-positioned to beat Q2 consensus estimates of W840 trillion. Though the currency weakness may be a drag to Q3 profitability, we believe the potential for lower profits in the second half of the year has already been priced in by the market. PKX shares are highly correlated to the Chinese steel market, and since we expect Chinese steel prices to bottom out this summer as they reach product cost. One analyst astutely points out that “In normal times, the Korean steel sector index leads Chinese hot-rolled coil (HRC) prices by two to three months. However, in case of sharp market corrections resulting from macroeconomic risks, the time lag tends to narrow to less than one month.” We expect PKX shares hit a trough between Q2 and Q3 and feel that shares are attractively valued as its current P/B of ~0.78x is only slightly above its historic low P/B of ~0.7x.
Brookfield Asset Mgmt (NYSE: BAM) BAM remains one of our top REIT picks and is also held by Tom Gayner, Murray Stahl, and Robert Caruso. BAM had a solid Q1 with earnings beating consensus estimates and funds from operations (FFO) per share coming in at $0.40, representing a 20% y-o-y jump from $0.33. Much of the beat can be attributed to the investment in the “investment and other income” category and the renewable energy division. The asset management business has been growing fees (up 9% q-o-q) however the total fees still do not exceed unallocated corporate overhead. If the shares are to trade at a premium to tangible net asset value (TNAV), it’ll be necessary for BAM to get to a place such that total fees exceed its unallocated costs. That being said, this year should be the first that Brookfield Infrastructure Partners LP (BIP) (formed about five years ago) brings in incentive distributions that move the needle. In Q1 $4 million in incentive distributions were reported. Going forward we anticipate that BIP will become increasingly important in overall fee generation. To top it all off, BAM is very well capitalized and very liquid. As of Q1 there was $1.4 billion of cash and financial assets on the balance sheet plus $0.9 billion accessible on the revolving credit facility for a total of $2.3 billion in liquidity. Note that BAM has been active in the capital markets lately: it issued $C300 million of 4.5% rate-reset preferred shares and C$425 million of 7 year, 3.95% notes, most of which will be used to redeem $600 million of fixed rate liabilities, 6.5% weighted-average interest rate. We see BAM as starting off 2012 with strong momentum and expect this momentum to carry forward through the remainder of the year.
Forest City Enterprises (NYSE: FCE.A) FCE’s Q4 was largely eventful. Operating results were strong, as expected. Land group and residential group net operating income (NOI) performed slightly better than we had expected but missed on commercial group NOI. In addition, the company saw a penny of lighter than expected. Operating metrics were inline with our expectations: same store NOI was up 4.5%, mostly helped by the 11.9% NOI growth in the residential group. Fixed charges coverage remains unappealing at 1.5x and debt to market cap at approximately 77%. Basic metrics asides, our interest lies in the strategic initiatives underway. A few months ago, management announced a number of strategic actions intended to align the company with the broader publicly traded real estate market. Thus far, there has been a lot of progress with plans to focus on its core markets and to divest the majority of its land business (resulting in write-offs of $154.5 million for the quarter). Also, Ridge Hill is no longer in the development pipeline. Management’s plan is to keep its construction pipeline to less than 15% of assets. We view all the initiatives favorably, especially those aimed at better corporate governance and disclosure. However, we would like to see additional progress on the numerous initiatives before establishing a position. Billionaire Ken Griffin initiated a brand new position in the stock during the first quarter (see Ken Griffin’s new stock picks).
