Dear Fellow Shareholders,

We are pleased to provide you with the Third Avenue International Real Estate Value Fund’s (the “Fund”) report for the quarter ended March 31, 2025. During the period, the Fund generated a return of +5.99% (after fees) compared to the most relevant benchmark, the FTSE EPRA/NAREIT Global ex-U.S. Index¹ (the “Index”), which returned +2.68% (before fees) for the same period.

OBSERVATIONS

The Fund’s outperformance in the quarter can largely be attributed to (i) a +60% return from leading Hong Kong data center company SuneVision – (investment thesis in our 3Q ‘24 Shareholder Letter), (ii) the positive impact of foreign currency appreciation which added +2.6% in the quarter, and (iii) the Fund’s high-conviction investments in Australian-manufactured housing real estate investment trust (“REIT”) Ingenia and European-industrial real estate owner and developer CTP, which generated approximately +25% and +17% total returns, respectively.

The Fund’s unique exposures to listed international real estate markets helped it act as a portfolio diversifier in the quarter, with its almost +6% return compared to a -2% decline in global equities³. This trend continued into April, with the Fund exhibiting lower volatility and downside than many liquid asset classes.

In the current environment of heightened trade and fiscal uncertainty, Fund Management considers it prudent for U.S.-based investors to diversify into tangible ‘real’ assets outside the U.S. As discussed in the Fund Commentary section, investors can benefit from deeply discounted (attractive) valuations with resilient and growing cash flows, together with significant potential currency appreciation from the Fund’s exposure to several undervalued currencies such as the Euro, Pound, Yen, Australian dollar, and Canadian dollar.

ACTIVITY

The potential for higher tariffs, increased industry protectionism, and a desire to ’reshore’ manufacturing suggests the long-term trend of ‘globalization,’ and the integration of economies could rapidly morph into a world where ‘localization and regionalization’ become the norm. Fund Management believes that some real estate asset classes will be key long-term beneficiaries of this trend. One is industrial and logistics real estate, where incremental manufacturing moves closer to consumers, and local supply chains and logistics are strengthened. This is particularly positive in economies with room for fiscal stimulus, such as continental Europe, where increased defense and infrastructure spending was recently announced by Germany, with plans to spend one trillion Euro supporting these initiatives over the next decade.  

The Fund’s most significant investment at quarter-end was in European industrial owner and developer CTP, which owns over 160 million square feet of light manufacturing and logistics real estate across central and eastern Europe.  During the quarter, Fund Management met with CTP executives and discussed regionalization trends, confirming that Asian-based manufacturers who had previously absorbed about 10% of CTP industrial space, were now taking up closer to 20%. Along these lines, CTP remains uniquely exposed to benefit from ongoing reshoring and fiscal stimulus in Europe in our view.

Expanding on Fund Management’s positive view of European logistics and industrial real estate, the Fund invested in Warehouses De Pauw (‘WDP’) during the quarter. The core of WDP’s portfolio is 57 million square feet of logistics assets in the Netherlands and Belgium, where logistics markets benefit from two of Europe’s largest ports (Antwerp and Rotterdam) and are integral to Europe’s industrial supply chains. Also of note, both markets feature high e-commerce penetration rates of ~20% of retail sales, with expectations of sustained growth benefiting warehouse demand. In addition, WDP has a presence in the growing low-cost manufacturing hub of Romania and owns a ~10% stake in listed Swedish logistics owner and developer Catena.

Having followed the company closely for many years, Fund Management can attest to WDP having several attractive attributes, including an aligned management team and a long-term oriented family controlling approximately 20% of shares; a strong track record of creating value through operating and developing logistics assets in supply-constrained markets; and a well-capitalized balance sheet with resilient rental rates supported by indexation to inflation levels. Further, shares trade at attractive levels, including a discounted 13.5x price-to-earnings ratio and a 6% implied capitalization rate (“cap rate”), supported by a dividend yield above 5%.

From a portfolio standpoint, WDP’s Western and Northern European exposures complement CTP’s exposure in Central and Eastern Europe. As recently discussed in our 2Q 2024 Shareholder Letter, the Fund also has exposure to southern European logistics real estate through diversified Spanish and Portuguese (Iberia) REIT Merlin Properties. Merlin Properties has a leading Iberian logistics portfolio, including in the port of Barcelona, through a joint venture with ZAL Ports.

Overall, the Fund has a diverse 10% exposure to industrial and logistics real estate in Europe, totaling 300 million square feet through these three investments. In Fund Management’s opinion, they also form a unique exposure and will be key long-term beneficiaries of the tailwinds of ‘localization and regionalization’.

While the impact of ‘localization and regionalization’ on logistics and industry appears quite straightforward, an unintended consequence of the U.S. tariffs and immigration policies could be a negative impact on the number of international student enrollments in the U.S., as the U.S. is increasingly viewed as an ‘unfriendly’ destination, particularly for mainland Chinese students. In choosing higher education alternatives, many international students will compare several potential destinations, with the U.S., the U.K., Australia, and Canada all being high on the list.

A key beneficiary of a change in demand appears to be the U.K., particularly U.K.-listed student accommodation REIT Unite Group (“Unite”), which owns a portfolio of 153 purpose-built properties providing accommodation for 68,000 students across the U.K.’s world-class universities. About 30% of Unite’s portfolio is rented to international students, with international demand up 3% for 2025/26 applications, including a substantial 9% increase from Chinese students. That said, most of the portfolio is rented to domestic U.K. students where demand is also positive, with expected growth of 11% in the number of U.K. 18-year-olds by 2030.

Alongside limited new student accommodation supply, Unite seems to be in a good position to deliver consistent and resilient rental growth, as highlighted by their 2025-year guidance of 4-5% rent growth. These positive underlying fundamentals are complemented by Unite’s management and development capabilities, which provide optionality in creating value over time, supported by a well-capitalized balance sheet. Despite these attractive attributes, Unite’s shares trade at discounted levels, with an implied real estate cap rate of 6% and £100k per unit value compared to recent private market transactions at cap rates around 4.5% and £140k per unit.

Like most of the Fund’s investments, entities like WDP and Unite share underlying real estate characteristics that should generate attractive rental and net asset value growth over time. A smaller portion of the Fund’s capital is deployed in special real estate situations where a deeply discounted real estate entity is determined to have an upside catalyst to help recognize that value. Such catalysts normally include ‘resource conversion’, through takeover or merger activity, the sale of a significant portion of assets, share buybacks, or sometimes the pending completion of a meaningful development program not factored into the current share price.

As mentioned in our 1Q 2024 Shareholder Letter, Japan has many resource conversion opportunities given deeply discounted (attractive) valuations. Pleasingly, there has been an uptick in activist investor activity amidst regulatory pressure to increase corporate Japan’s return on capital and boost shareholder returns. There has been some activist success in listed real estate companies where asset sales, business simplification, share buybacks, and governance improvements result in enhanced shareholder returns. This has benefited the Fund through its investments in Japanese real estate operating companies Tosei and Nomura Real Estate.

However, discounts remain wide compared to private market real estate values despite some improvements. The Tokyo Stock Exchange also emphasizes simplifying corporate Japan by consolidating subsidiaries and cross-shareholdings, many examples of which exist in the listed real estate space. With that in mind, the Fund invested in a Japanese real estate ‘special situation’ during the quarter that should result in a large Japanese corporation consolidating its listed real estate subsidiary—which trades at a persistent discount to its conservatively valued real estate.

Following the additions of WDP and Unite, as well as the special situation in Japan, the Fund’s regional exposure remains diverse as evidenced in the following chart.

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DIVERSE REGIONAL EXPOSURE^*

Regarding asset types, nearly two-thirds of the Fund’s capital is deployed in residential, industrial/logistics, and self-storage real estate assets. In addition, exposure to the traditional commercial real estate asset types of retail and office comprise 22% of the Fund, substantially lower than an index exposure of almost 50%. Further, specialized real estate assets like lodging, student accommodation, and data centers comprise 15% of the Fund.

CURRENT ASSET TYPES

Given the Fund’s exposure to companies focused on individual property types in select geographic markets, its holdings tend to be more focused than the large market cap constituents in the Index. As a result, the Fund’s holdings are often characterized as small—and mid-market-cap companies, as Illustrated below.

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FUND COMMENTARY

With tariff-led market volatility in the first weeks of the second quarter, the Fund’s status as a relatively defensive portfolio diversifier continues. For instance, the Fund’s year-to-date returns when publishing this letter are approximately + 8%, while global equities have declined approximately -5%. We attribute this to several of the Fund's underlying investment characteristics, including:

1. Each investment has a wide valuation ‘margin of safety’ with low expectations and deeply discounted valuations (average 13x P/E, 35% discount to real estate value) that can reduce the risk of a significant drawdown.
2. Most of the Fund’s investments derive cash flows from high-margin rental income from assets with pricing power that should prove resilient under various economic conditions. Fund Management believes the risk is further reduced as the Fund owns very well-capitalized companies with low refinancing risk.
3. The Fund’s investments comprise tangible ‘real assets’ that provide a long-term inflation hedge. With a ramp-up in construction costs post-COVID and increased return on capital requirements, new real estate supply entering markets is low, providing a positive backdrop for long-term growth.
4. …and finally, an acknowledgment that real estate depends on ‘local’ market conditions; as such, any tariff-induced retracement from ‘globalization’ to ‘localization or regionalization’ can be positive for certain real estate types.

Another important aspect of the differentiated returns has been the Fund’s exposure to foreign currencies. Since the Fund’s inception over 10 years ago, a strong U.S. Dollar has been a headwind on Fund performance, though this is now starting to be a tailwind.  While interpretations of U.S. policy often conflict, it seems to favor a weaker U.S. Dollar, particularly versus trade surplus nations such as Japan and members of the Europe Union. Indeed, recent tariff announcements suggest that some damage has been done to the U.S. growth outlook and foreign investors' willingness to fund the external U.S. deficit.  

While it is difficult to quantify just how overvalued the U.S. Dollar is, some measures such as purchasing power parity (‘PPP’) can be used as a rough guide, with the calculation based on the differences between a basket of goods or services between countries. This PPP methodology, using OECD estimates, suggests that the U.S. Dollar is overvalued by about 35% relative to the Fund’s underlying currency exposures⁴. If the U.S. Dollar were to revert to equivalent levels based on purchasing power, it would imply a significant upside for the Fund’s holdings denominated in foreign currencies. This is in addition to the steep (attractive) discounts international real estate shares trade at compared to the value of the real estate they own.

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In combination, the current backdrop reminds Fund Management of another period: the post-tech bubble environment in the early 2000s. For instance, at the start of 2000 (the peak of the tech bubble), international listed real estate had suffered a period of meaningful underperformance versus broad equity indices, just like today.

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At that time international commercial real estate had spent the better part of a decade absorbing the excess supply following the early 1990s recession. This was exacerbated by Japan’s ‘lost decade’, together with the Asian Financial crisis in the late 1990s. As such, limited new real estate supply would be a powerful growth driver for many international markets in the early 2000s when demand picked up. This period (2000-2005) saw international listed real estate dramatically outperform global equities. Initially, the international real estate sector proved more resilient than global equities during a market ‘regime change’, after which positive underlying real estate fundamentals, an easing of financial conditions, and a weakening U.S. dollar acted as a powerful return catalyst. For further context, international real estate total returns compounded at about +16% per year over the ensuing five years, while global equities declined by almost -3% per year during the same time frame. Even when expanding the time horizon to incorporate the global financial crisis, international real estate compounded +10% per year for the 10 years through March 2010, while global equities posted negative returns.

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While no two time periods will be the same, there are several similarities to today. That is to say, many international real estate markets have also had less supply added in recent years, as a function of COVID, higher interest rates, and higher construction costs. Similarly, a ‘regime change’ in equities seems to be underway where the previous technology leaders become laggards, and the U.S. Dollar appears overvalued on a PPP basis. Finally, like at the start of 2000, international listed real estate valuations are attractive, with low multiples and notable discounts to underlying real estate value.

A key difference is that today, the listed international real estate sector offers much higher-quality investment opportunities. Why is that the case? Over the past 25 years, listed companies have worked to boost asset quality and improve management incentives and governance structures. Additionally, many international real estate companies (including those held in the Fund) have increasingly focused on enhancing returns on capital while also improving balance sheet leverage and overall liquidity relative to the early 2000s.

With this in mind, Fund Management remains constructive on the outlook for the Fund. We thank you for your continued support and look forward to writing to you again next quarter. In the meantime, please don’t hesitate to contact us with any questions or comments at realestate@thirdave.com.

Sincerely, The Third Avenue Real Estate Value Team

Quentin Velleley, CFA Portfolio Manager