Investment Pitches

Pitch Summary:
Earlier in the new year we initiated a position in Arch Capital Group Ltd. (ACGL) and continued to add to it throughout the quarter amidst some concerns over the disastrous California wildfires. Arch Capital is a Bermuda-based diversified insurance operation that writes a portfolio of excess and surplus insurance (E&S), reinsurance, and private mortgage insurance (PMI). After a few years of a hard market, it is very reasonable to question how much longer strong returns can last. However, the shares currently trade hands at an undemanding valuation with favorable structural tailwinds. The insurance industry is a mixed bag in terms of business quality. On one hand, policies are somewhat commoditized. Insureds typically reach for the lowest cost option, so insurers must offer competitive prices on the policies that they wish to write. Insurers who price their policies too high will not have any customers, while insurers who price their policies too low can lose significant amounts of money after claims roll in. Unlike other commoditized industries, insurers will not know the true cost of the policies they write today until claims are made, which can take many years if not decades. It is a challenging business to be in and many operations generate poor long-term returns. On the other hand, there are some insurance companies that have realized extraordinary long-term returns, such as Berkshire Hathaway. Is it the luck of the draw? Or are there differences in how a great insurance business operates compared to the average one? A large part of the problem lies within the delayed gratification of sustainable underwriting practices. When competition is intense, underwriters feel pressure to defend their market share and write policies at aggressive rates. In the long run, this practice leads to a book full of poorly compensated risks, reducing earnings and the ability to write more policies. Insurance agents that are incentivized by near-term performance measures, such as written premium growth, will behave without the long-term consequences in mind. This conflict in the goals and objectives between the firm and its underwriters results in an agency cost. If left unmanaged, this agency cost leads to mediocre, if not outright poor, returns. Arch pays incentive compensation to most of its underwriters using a ten-year lookback based on the profitability of their written policies. This is unique to the industry, where many firms instead compensate on the basis of premium growth or current year profitability. This has so far been an effective way to manage the inherent agency costs in the business model – Arch has one of the lowest combined ratios amongst diversified insurers, standing at an average 88% over the last 15 years. Arch has no written premium target and will cede share back to the market when pricing is inadequate. Many firms say that they do this, however, not all of them are effective in doing so. Arch has other ways of minimizing agency costs across the value chain. In commercial E&S lines, policies are often placed through a broker due to the complicated nature of the risks being underwritten. From my research, Arch is one of the easiest insurers to work with as a broker due to the speed and ease at which they are able to provide quotes. Arch uses a data-driven and analytically heavy process to quickly price a policy and rarely if ever negotiates beyond the first quote. The simplified relationship often gives Arch the first look at a policy, reducing the adverse selection that may come from taking risk that others have passed on. On a broader note, Bermuda has been raising the capital requirements for reinsurers as of late, driving capacity lower and benefiting strong incumbents, such as Arch. After an increase in social inflation, or costs incurred by an increase in non-economic factors like litigation tendencies, the insurance industry has also moved to tighten the terms and conditions of written policies. This should be a more sustainable benefit for insurers compared to supply-driven increases in underwriting profitability. While Arch's combined ratio is likely to creep higher later into the cycle, I believe that the shares are trading at an attractive valuation relative to normalized earnings.

BSD Analysis:
The manager presents a compelling bull case for Arch Capital Group, emphasizing the company's superior underwriting discipline and structural competitive advantages. The key thesis centers on Arch's unique ten-year lookback compensation structure for underwriters, which aligns incentives with long-term profitability rather than short-term premium growth. This has resulted in an impressive 88% average combined ratio over 15 years, significantly outperforming industry peers. The manager highlights Arch's operational efficiency in the broker channel, where their data-driven pricing process and speed of execution provides first-look advantages and reduces adverse selection. Regulatory tailwinds from increased Bermuda capital requirements are creating capacity constraints that benefit established players like Arch. The manager acknowledges cyclical headwinds but believes current valuations adequately compensate for normalized earnings potential. The pitch demonstrates deep understanding of insurance industry dynamics and agency cost management, positioning Arch as a quality operator in a challenging sector.

Pitch Summary:
Net Lease Office Properties is marketing multiple buildings for sale, including the iconic "Binoculars Building" in Los Angeles, which is leased to Google through 2030. Net Lease will soon be able to begin distributing cash to shareholders, having paid down nearly all recourse debt through property sales. Unlike Net Lease, which is pursuing a liquidation strategy, Peakstone Realty is seeking to reduce the stigma of office ownership by diversifying into niche industrial properties. The market has yet to give them credit for selling off lower-quality office buildings and buying industrial outdoor storage assets, but I expect the market to reassess once industrial properties account for more than 50% of rents and net operating income. Net Lease shares change hands at a 38% discount to my estimate of net asset value.

BSD Analysis:
The manager presents a compelling value play in Net Lease Office Properties, emphasizing the company's successful execution of a liquidation strategy that has dramatically improved its financial position. The sale of high-quality assets, including the iconic Google-leased Binoculars Building with lease security through 2030, demonstrates the portfolio's underlying value. The company has effectively deleveraged by paying down nearly all recourse debt through strategic asset sales, positioning it to begin cash distributions to shareholders. Trading at a substantial 38% discount to the manager's net asset value estimate, the shares appear significantly undervalued. The liquidation strategy provides a clear path to value realization, with the market likely to re-rate the shares as the cash distribution capability becomes evident and the balance sheet strength is recognized.

Pitch Summary:
Our other UK-listed company, McBride Plc, has also been a strong contributor this year. The company reported excellent 2024 results, with continued strong earnings and a bright outlook. Even so, shares trade at only 6x operating income and less than 6x normalized earnings, far too cheap for a defensive company selling soaps and detergents. A large US university's endowment is McBride's third-largest shareholder, and the endowment has been steadily selling down its position. I believe this selling activity is keeping a lid on McBride's share price, and that shares will respond once the endowment's selling activity abates. McBride intends to reinitiate its dividend later this year. UK Retail investors ("punters," in the lingo) love a dividend, so the move could raise McBride's profile.

BSD Analysis:
The manager presents a value-oriented bull case for McBride, emphasizing the disconnect between strong fundamental performance and compressed valuation metrics. With shares trading at only 6x operating income and normalized earnings, the valuation appears deeply discounted for a defensive consumer staples company in the household products sector. The manager identifies a specific technical headwind - selling pressure from a large US university endowment that represents the third-largest shareholder - which is artificially suppressing the share price. This creates a clear catalyst for re-rating once the institutional selling subsides. The upcoming dividend reinitiation serves as an additional catalyst, particularly given UK retail investors' preference for dividend-paying stocks, which should broaden the shareholder base and improve market recognition.

Pitch Summary:
This year's best performer has been Zegona Communications. Zegona acquired Vodafone Spain last year in a leveraged buyout transaction. Following the purchase, management's mission was two-fold. First, to improve revenue, earnings, and cash flow by cutting costs and attracting new customers. And second, to de-lever the balance sheet by selling Vodafone Spain's prime fiber-optic network assets. Management has made great strides toward each objective, and the market has noticed. I expect the sale of Vodafone Spain's fiber assets to close in the next few months, which will transform the company's balance sheet and allow for a return of capital to investors. Despite the strong move in Zegona's share price, shares are still attractively priced.

BSD Analysis:
The manager presents a compelling bull case for Zegona Communications based on successful execution of a dual-pronged strategy following their leveraged buyout of Vodafone Spain. The investment thesis centers on operational improvements through cost reduction and customer acquisition, coupled with strategic asset monetization via the sale of prime fiber-optic network assets. Management has demonstrated strong execution on both fronts, with the market beginning to recognize this progress through share price appreciation. The upcoming fiber asset sale represents a significant catalyst that will dramatically improve the balance sheet and enable capital returns to shareholders. Despite recent gains, the manager believes shares remain attractively valued, suggesting further upside potential as the transformation story unfolds.

Pitch Summary:
Sun International is a leading casino, resort/hotel, online betting and pub slot machine operator in South Africa. The company has gone through a transformation in the last five years as it was caught with too much leverage during COVID. Since then, the company has cut costs, raised equity and sold their Latam operations. They are now spending on refurbishment and returning significant excess cash to shareholders. The company has a long-term activist fund influencing the board and there is some chance of a significant M&A deal with a large competitor. The casino business is licensed and relatively protected from competition whilst online is growing rapidly and their omni-channel presence should provide them with superior performance. Sun International was founded in 1967 and since then it operates in the gaming and resort business in South Africa. The group previously held assets in Latin America (Argentina, Chila, Colombia, Panama and Peru) and other African countries. However, as COVID hit, the company found itself highly levered (peaking at >8x at year end 2020) as they were spending considerably on the build out of assets. The company had to pivot from growth capital expenditure to cost cutting and saving their balance sheet. The company had planned to IPO the Latam assets after selling down to 50% with their junior partner. However, this was renegotiated to a full sale in August 2020 as the pandemic struck. There are still some contingent payments from the sale to be collected. The company did a large rights offer in 2020, raising $R1.2 billion. The company also exited Nigeria recently. The company is now South Africa focused and breaks down its business into four segments Urban Casinos, Sun Slots, Sun Bet and Resorts & Hotels. The Urban Casinos (54% Sales, 60% EBITDA) segement includes the operations of nine casinos situated in urban locations. Net gaming casino revenue was flat in 2024, outperforming the sector, mainly supported by the largest casino in the portfolio. Non-gambling activity remained supportive. Sun managed to gain market share in a flat market. A healthier domestic economy should support the urban casino business, while an omnichannel approach should drive growth in online gaming and attract younger cohorts to the casino floor. The Resorts & Hotels (26% Sales, 21% EBITDA) segment includes the operations of four hotels mostly located in holiday regions. Sun City is the main contributor with 61% of segment sales and EBITDA. The market has experienced a strong recovery, driven by robust domestic demand, conferencing and a resurgence in international tourism. Sun international delivered well in this market, delivering 7.6% sales and 11.8% Adjusted EBITDA growth in 2024, SunSlots (11% Sales, 9% EBITDA) holds six licenses to operate LPMs in four out of nine provinces of South Africa. LPMs are usually installed in pubs/bars with Sun monitoring operations in exchange for a shared revenue agreement with the pub/bar owner. The LPM business gives exposure to a different demographic and socio-economic clientele and is much less reliant on "destination" locations, making it less correlated to the rest of the business. The sector though, faces pressure as traffic recovery of LPMs is slow nationwide, possibly due to punter migration to online slots during intense load-shedding. Following the wider industry trends, Sun reported 3.1% YoY sales and 2.6% EBITDA decline in 2024, improving margins in a down year. The Sunbet (9% Sales, 10% EBITDA) segment is Sun's online gaming platform which offers both sports betting and online casino products. Sun International brand and loyalty offering supports customer retention and add value to management's omni-channel strategy, by countering the online migration trend. SunBet recorded a 60.6% YoY Sales and 64.3% EBITDA growth in 2024. Growth continues to accelerate with GGR approaching R$1.3 billion already surpassing its five-year target of R$1.3bn as set out at the CMD in 2022, placing it in the top five in South Africa with an estimated market share of 4.5%. Sun has generated R$6.2bn in cash flow from operations over the last three years. Over that period, Sun has returned R$3.1 billion of capital to shareholders, of which R$2.9 billion in dividends and R$200m in share buy-backs. The reminder was used to upgrade company's estate. We expect elevated capex in 2025, but it should reduce closer to maintenance thereafter, boosting free cash flow from 2026. In 2024 the company distributed R$416 million interim gross dividend, R$612 million final gross dividend and R$141 million share buy-back for a total of R$1.2 billion capital return. In the meantime, Sun is trying to obtain regulatory approval for the acquisition of one of the two major peers, Peermont (a private equity sponsored casino operator with eight casinos across South Africa and two in Botswana). The company has committed to a dividend pay-out ratio of 75%, which will decrease to 50% if the Peermont M&A moves forward. Leverage sits comfortably below the 2.0x target, thus if the deal is cancelled there is room for further capital distributions. South Africa faces a prolonged energy crisis from the ageing infrastructure and insufficient energy generation. While Sun has been affected by the energy crisis, the rollout of alternative energy strategies has mitigated the risk. Smoking ban legislation is also under discussion which could affect sales for the short-term, in line with smoking bans on other jurisdictions. Finally, the relocation of a competing casino closer to a Sun dominated area should also be considered a risk. However, the competitor's 20% stake to Sun's casino would likely avert aggressive behavior. Other than these, Sun operates in an emerging market and performance could be affected by the local economy and exchange rates. After 26 years with Sun, Anthony Leeming, the CEO since 2017, decided to retire but will remain with the company until December 2025. Ulrik Bengtsson, a Swedish national with two decades of experience in leading international listed companies across the gaming, betting and telecom industries (Betsson CEO 2013-18 and William Hill CEO 2018-21) will take over. We are particularly impressed with his resume and believe he will benefit Sun, especially their online expansion plans. Moreover, having Value Capital Partners, a highly regarded asset manager, as an anchor investor with two board seats builds further confidence in the investment thesis. The shares trade at <7x earnings, 15% FCFE 2026, >10% dividend yield, which seems attractive. We think the stock could double.

BSD Analysis:
Palm Harbour Capital presents a compelling turnaround story in Sun International, a South African gaming operator that has successfully deleveraged from over 8x debt-to-EBITDA during COVID to below 2x currently. The manager highlights the company's transformation through asset sales (Latin America operations), cost cutting, and strategic refocusing on the South African market across four segments: Urban Casinos, Resorts & Hotels, SunSlots, and the rapidly growing SunBet online platform. The investment thesis centers on the company's omnichannel strategy, with SunBet achieving 60% revenue growth and surpassing five-year targets ahead of schedule. Strong cash generation of R$6.2 billion over three years has enabled R$3.1 billion in shareholder returns, demonstrating management's commitment to capital allocation. The potential acquisition of competitor Peermont could create significant synergies in a consolidated market. Trading at attractive multiples of <7x earnings and 10% dividend yield, the manager sees potential for the stock to double, supported by new leadership with strong gaming industry experience and activist investor involvement through Value Capital Partners.

Pitch Summary:
The Trade Desk offers customers a cloud-based ad-buying platform that empowers advertising agencies, brands, and other service providers to plan, manage, optimize, and measure data-driven digital advertising campaigns. The Trade Desk's competitive moat stems from its industry leading technology stack, its trusted brand due to its singular focus on the buy-side of the ad ecosystem (no conflicts of interest), and its transparent reporting that details the ROI on each ad dollar spent. The stock's underperformance in the quarter was due to the mid-February earnings announcement that missed Street expectations for the first time in 33 quarters. The miss was a result of a series of small execution missteps, with a December company reorganization and a focus on internal scalability and effectiveness being the most prominent reasons.

BSD Analysis:
Ithaka acknowledges The Trade Desk's strong competitive positioning while expressing concern about recent execution challenges. The manager highlights the company's industry-leading technology platform and trusted brand built on buy-side focus without conflicts of interest. The Trade Desk's transparent ROI reporting creates significant value for advertisers and strengthens client relationships. However, the company's first earnings miss in 33 quarters raises questions about execution consistency. The manager attributes the miss to internal reorganization efforts and scalability initiatives rather than fundamental market issues. While these operational improvements may benefit long-term performance, they created near-term disruption. The company's competitive moat remains intact through its technology stack and market positioning. The manager appears cautious about near-term performance while recognizing the underlying business quality. The Trade Desk's focus on programmatic advertising positions it well for continued digital advertising growth trends despite current execution challenges.

Pitch Summary:
Nvidia is the undisputed leader in accelerated computing, with dominant market share in Graphics Processing Units (GPUs) powering AI workloads across data centers, edge devices, and emerging platforms. Its end-to-end ecosystem—from silicon to software (CUDA, networking, and AI frameworks)—creates high switching costs and a widening competitive moat. With secular demand for AI infrastructure still in its early innings, Nvidia stands to benefit from sustained topline growth and strong operating leverage. In early January, a little known Chinese AI company, DeepSeek, released its large language model (LLM), DeepSeek-R1, to an unexpecting world. This model was purportedly trained on very few high-end Nvidia chips and was highly efficient when compared to other leading models. This release set off a chain reaction where investors have had to grapple with the idea that the world may not need as many GPUs as previously thought, which hampered the Nvidia buy-case and sent the P/E multiple down to its cheapest level in the past 5 years.

BSD Analysis:
Ithaka maintains a bullish long-term view on NVIDIA despite acknowledging near-term challenges from AI efficiency improvements. The manager emphasizes NVIDIA's dominant market position in AI-focused GPUs and its comprehensive ecosystem spanning hardware and software solutions. The end-to-end platform including CUDA, networking, and AI frameworks creates significant switching costs and competitive advantages. However, the emergence of DeepSeek's efficient AI model trained on fewer NVIDIA chips has created uncertainty about GPU demand assumptions. This development compressed NVIDIA's valuation to five-year lows, presenting a potential opportunity for long-term investors. The manager believes secular AI infrastructure demand remains in early stages despite efficiency improvements. NVIDIA's integrated ecosystem and market leadership position it to benefit from sustained AI adoption trends. The current valuation compression may represent an attractive entry point given the company's fundamental competitive advantages and long-term growth trajectory in accelerated computing.

Pitch Summary:
Founded in 2004, ServiceNow has become the leading provider of cloud-based software solutions that define, structure, manage and automate workflow services for global enterprises. ServiceNow pioneered the use of the cloud to deliver IT service management ("ITSM") applications. These applications allow users to manage incidents and to plan new IT projects, provision clouds, manage application performance and build applications themselves. The company has since expanded beyond the ITSM market to provide workflow solutions for IT operations management, customer support, human resources, security operations and other enterprise departments where a patchwork of semi-automated processes have been used with varying success in the past. ServiceNow's stock fell during the quarter, driven by the announcement that its much anticipated AI Agents offering is going to be offered as a consumption-based model, vs the expected seat-based model. This change will make revenue recognition fall further into the future, as clients can take their time adopting (and therefore paying) for the new product.

BSD Analysis:
Ithaka acknowledges ServiceNow's market leadership in enterprise workflow automation while expressing concern about near-term execution challenges. The manager recognizes the company's pioneering role in cloud-based IT service management and its successful expansion into broader enterprise workflow solutions across multiple departments. ServiceNow's platform addresses the inefficiencies of semi-automated processes that plague many enterprise operations. However, the investment thesis faces headwinds from the company's decision to offer its AI Agents product on a consumption-based rather than seat-based model. This pricing strategy change delays revenue recognition and creates uncertainty around adoption timelines. The manager appears cautious about the impact on financial predictability as clients can delay implementation and payment. While ServiceNow maintains its market-leading position, the execution misstep around AI Agents monetization creates near-term challenges. The company's broad platform expansion demonstrates strategic vision, but revenue model changes introduce timing risks for investors.

Pitch Summary:
Uber Technologies employs a marketplace-based technology platform used to match drivers and their vehicles with individuals, products, and packages moving from point A to point B. The company offers its ~6M independent contractors (drivers) access to its 170M monthly active users (riders), providing both parties real-time access to logistics services. Uber's business consists of three segments: Mobility, Delivery, and Freight. These businesses combined for ~$160B in annual bookings across 11.3B trips in 2024. During the company's fourth quarter earnings announcement CEO Dara Khosrowshahi laid out his vision why Uber will play an important role in the future where cars are largely autonomous. This written piece helped remove an overhang on the stock and got investors comfortable with Uber's future prospects. Additionally, the stock was helped by the announcement that renowned investor Bill Ackman had taken a position in the company as a top 15 shareholder.

BSD Analysis:
Ithaka maintains a bullish view on Uber based on the company's massive scale and strategic positioning for autonomous vehicle adoption. The manager highlights Uber's impressive network effects with 6 million drivers serving 170 million monthly active users across multiple business segments. The platform's $160 billion in annual bookings across 11.3 billion trips demonstrates significant scale and market penetration. CEO Dara Khosrowshahi's articulation of Uber's role in an autonomous future helped address investor concerns about technological disruption to the business model. The manager views this strategic clarity as removing a key overhang on the stock. Bill Ackman's investment as a top 15 shareholder provides additional validation of the investment thesis. Uber's diversified platform spanning Mobility, Delivery, and Freight creates multiple revenue streams and cross-selling opportunities. The company's marketplace model benefits from strong network effects that should strengthen as the platform scales.

Pitch Summary:
Visa is one of two leading companies (along with MasterCard) that helps share information and transfer funds between banks that have relationships with card-carrying consumers and banks that have relationships with merchants, ensuring payment transactions are reliable and secure. Since the company's founding in 1958, Visa has been benefiting from growth in personal consumption expenditure, a strong secular shift from cash and checks to credit and debit cards, and an asset-light, high-margin business model that generates strong free cash flow and resilient earnings, even in volatile macro environments. In the first quarter Visa saw its stock trade up in a tumultuous market tape, as investors tend to flock to more steady earning compounders, of which Visa is an ideal candidate.

BSD Analysis:
Ithaka views Visa as a defensive growth play with exceptional business model characteristics. The manager emphasizes Visa's duopoly position alongside Mastercard in the global payments infrastructure, creating significant competitive moats. The investment thesis is built on multiple secular tailwinds including rising personal consumption expenditure and the ongoing shift from cash to digital payments. Visa's asset-light model generates consistently high margins and strong free cash flow, making it particularly attractive during volatile market conditions. The company's resilient earnings profile provides stability that investors seek during uncertain times, as evidenced by its outperformance in Q1 2025's turbulent market. The manager views Visa as an ideal defensive compounder with steady earnings growth. The company's foundational role in the global payments ecosystem positions it to benefit from long-term digitization trends regardless of economic cycles.

Pitch Summary:
From the front-lines of warzones to Fortune 500 enterprises, Palantir Technologies builds software to address high-level action items, respond to defense and security concerns, and improve organizational efficiency. The company offers a number of software products from data analysis and curation (Palantir Gotham and Foundry) to a cloud-based operations software (Apollo). The company rose to popularity, in part, due to several government contracts (~55% of revenues) arising from recent and continuous global conflicts. In addition to creating generative AI defense solutions for governments across the globe, commercial customers (~45% of revenues) have flocked to the company's security and data analysis solutions to monitor and analyze business data and protect sensitive information. The stock's rise in the quarter was due to a strong earnings report that beat Street expectations as well as investor excitement with regard to the company's ability to further monetize its AI product across its growing customer base.

BSD Analysis:
Ithaka maintains a bullish stance on Palantir, highlighting the company's unique positioning in both government and commercial markets. The manager emphasizes Palantir's diversified revenue base with approximately 55% from government contracts and 45% from commercial customers, providing stability through geopolitical tensions. The investment thesis centers on the company's ability to monetize AI capabilities across its expanding customer base, particularly as organizations increasingly prioritize data security and analysis. Strong quarterly earnings that exceeded expectations validate the company's execution capabilities. The manager views Palantir's specialized software solutions for high-stakes environments as creating significant competitive advantages. The company's expansion into generative AI defense solutions positions it well for continued government contract growth. Palantir's ability to serve both Fortune 500 enterprises and defense applications demonstrates the scalability and versatility of its platform technology.

Pitch Summary:
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.

BSD Analysis:
Third Avenue views Unite Group as a beneficiary of shifting international student demand patterns, particularly as U.S. immigration policies may redirect Chinese students to UK universities. The company owns 153 purpose-built properties accommodating 68,000 students, with 30% international occupancy showing 3% growth in 2025/26 applications and 9% increase from Chinese students specifically. Domestic demand fundamentals are equally compelling, with an expected 11% growth in UK 18-year-olds by 2030 providing a strong demographic tailwind. Limited new supply construction creates favorable market dynamics for rental growth, with management guiding 4-5% rent increases for 2025. The investment case is strengthened by Unite's development capabilities and well-capitalized balance sheet providing value creation optionality. Valuation appears attractive at 6% implied cap rate and £100k per unit versus private market transactions at 4.5% cap rates and £140k per unit, suggesting significant upside potential.

Pitch Summary:
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%.

BSD Analysis:
Third Avenue initiated a position in WDP based on its strategic positioning in European logistics markets and attractive valuation metrics. The company's 57 million square feet portfolio benefits from proximity to Europe's largest ports (Antwerp and Rotterdam), providing integral access to industrial supply chains. The investment thesis is strengthened by high e-commerce penetration rates of ~20% in Belgium and Netherlands markets, with sustained growth expected to drive warehouse demand. WDP's expansion into Romania's low-cost manufacturing hub and 10% stake in Swedish logistics developer Catena provide additional growth vectors. Management quality is highlighted by family ownership of 20% and a proven track record of value creation in supply-constrained markets. The valuation appears compelling at 13.5x P/E ratio, 6% implied cap rate, and 5%+ dividend yield, while inflation-indexed rental rates provide downside protection in the current environment.

Pitch Summary:
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.

BSD Analysis:
Third Avenue views CTP as uniquely positioned to benefit from the 'localization and regionalization' trend driven by potential higher tariffs and manufacturing reshoring. The company owns over 160 million square feet of industrial and logistics real estate across Central and Eastern Europe, providing exposure to a key beneficiary region of supply chain restructuring. Management's direct engagement with CTP executives revealed accelerating demand from Asian manufacturers, with their space utilization doubling from 10% to 20% of CTP's portfolio. This trend aligns with broader European fiscal stimulus initiatives, including Germany's announced trillion Euro infrastructure spending plan over the next decade. The investment thesis centers on CTP's strategic positioning in supply-constrained markets with strong fundamentals and growing demand from manufacturers seeking alternatives to traditional global supply chains.

Pitch Summary:
Demographic tailwinds extend beyond the U.S. residential markets, however, and offer investors the closest equivalent to a "free lunch" in the real estate space. They also serve the U.K. student-housing sector quite favorably when considering that the number of 18-year-olds (a proxy for those entering college) is projected to increase by more than 2.0% per year through 2030, without factoring in any further gains in international applications. When viewed in conjunction with the more restricted levels of new supply in the U.K., this demographic shift seems to structurally support the Fund's recent investment in the Unite Group plc ("Unite"). Founded in 1991, Unite is a U.K.-based REIT that is the largest owner of purpose-built student housing in the country, with an ownership stake in more than 150 properties and 65,000 beds—which are more than 97% leased and strategically located with approximately 90% of the properties serving Russell Group members (i.e., the top 24 universities in the U.K.). In addition to this best-in-class student housing portfolio, Unite is also recognized for controlling a "premier" platform as the company is (i) very well-capitalized with a loan-to-value ratio of less than 25%, (ii) very well-managed with the highest operating margins amongst European REITs, and (iii) positioned to drive further value creation, largely by increasing rents through contractual "step ups", undertaking accretive developments alongside university partners, and actively recycling capital through initiatives with long-standing joint venture partners. Despite those factors, the Fund was able to establish a position in Unite common stock at favorable prices during the period, through a combination of selling "out-of-the-money" put options (which were exercised) and purchasing shares in the open market. As a result, the Fund's basis in the common stock implies a "cap rate" for Unite's portfolio that exceeds 6.0% and a "price per bed" of approximately £100k per unit—which seem favorable with private-market transactions more recently implying cap rates of 4.5% and prices per bed exceeding £140k per unit, despite inferior quality in most cases. At the same time, Unite's cash flow seems likely to resume tracking the company's revenues (which have historically increased by 7-8% per annum) after having diverged more recently. Should this transpire, Fund Management believes the dividend payout would assume a similar trajectory and serve to narrow the price-to-value disconnect that currently persists. If not, it would be inconceivable for a strategic or financial sponsor to express interest in the company as Unite trades at more than a 20% discount to its stated Net-Asset Value ("NAV") without factoring in any value for this one-of-a-kind platform.

BSD Analysis:
Third Avenue established a position in Unite Group, the UK's largest purpose-built student housing REIT, capitalizing on compelling demographic trends showing 18-year-old population growth exceeding 2% annually through 2030. The manager emphasizes Unite's dominant market position with 65,000 beds across 150+ properties, 97% occupancy, and strategic locations serving 90% Russell Group universities. The investment thesis centers on Unite's "premier" platform characteristics including conservative 25% loan-to-value ratio, highest operating margins among European REITs, and multiple value creation levers through contractual rent increases and development partnerships. The manager acquired shares at attractive valuations implying 6%+ cap rates and £100k per bed versus private market transactions at 4.5% cap rates and £140k+ per bed for inferior assets. Trading at 20%+ discount to NAV, the manager expects cash flow normalization to drive dividend growth and narrow valuation gaps. The position represents a demographic-driven investment in a scarce, high-quality student housing platform with structural supply constraints.

Pitch Summary:
Along these lines, the Fund initiated a position in the common stock of a real estate business uniquely placed to meet these demand drivers: PulteGroup ("Pulte")—one of the largest homebuilders in the U.S. having delivered more than 31,000 homes across its Sunbelt-centric footprint in 2024. Founded in 1956, Pulte is recognized for its deep roots in the homebuilding industry, as well as its diverse product types with offerings for first-time buyers (Centex) and move-up buyers (Pulte). Notably, Pulte also controls the leading developer of age-restricted communities in the U.S. (Del Webb), which is now synonymous with active adult living more generally. In addition, Pulte is well-known in the industry for generating above-average margins—attributable to its scale, selective integration of "prefab" production, and "pricing power" within its Del Webb segment. Pulte has also solidified its financial position under CEO Ryan Marshall, having moved into a "net cash" position, while reducing the share count by nearly 50% through sensible share repurchases at the same time. Despite these aspects, Pulte's common stock has been out-of-favor more recently, implying a multiple of less than six times operating profits for its homebuilding business on a trailing 12-month basis. As far as Fund Management can tell, this is mostly due to the near-term concerns relating to the broader homebuilding space—including more elevated mortgage rates, rising new home inventory levels, and anticipated pressure on material costs and labor availability given recent (and anticipated) policy changes. Even so, Pulte's long-term positioning seems quite advantageous, and recent market volatility has led to a compelling price-to-value proposition.

BSD Analysis:
Third Avenue initiated a position in PulteGroup, viewing it as uniquely positioned to capitalize on favorable demographic trends, particularly the aging millennial cohort driving demand for single-family housing and active adult communities. The manager highlights Pulte's competitive advantages including its leading Del Webb active adult brand, above-average margins from scale and prefab integration, and strong financial position with net cash and 50% share count reduction. Despite trading at less than 6x operating profits, the manager sees this valuation discount as driven by temporary headwinds including elevated mortgage rates and inventory concerns rather than fundamental deterioration. The thesis centers on Pulte's transformation to a more defensive "land light" model with option-based land acquisition, positioning it alongside industry leaders like Lennar and D.R. Horton. The manager believes demographic tailwinds, particularly the 35-49 age cohort expansion and active adult demand, will drive long-term outperformance. The investment represents a contrarian bet on a quality homebuilder trading at distressed valuations despite structural competitive advantages.

Pitch Summary:
RBC Bearings, Inc. (RBC) also contributed. Like our other top contributors, strong financial results have driven RBC's stock higher, as the company reported steady growth for its aerospace and defense business. RBC sells highly engineered precision bearings and components to the industrial, defense and aerospace industries. We think its management team continues to execute at a high level and has done an excellent job integrating a fairly recent acquisition. We continue to like the company and believe investors underappreciate RBC's large, diversified aerospace business, especially given the strong worldwide growth in commercial aviation fleets.

BSD Analysis:
Wasatch maintains strong conviction in RBC Bearings, viewing the company as undervalued despite recent stock appreciation driven by solid financial performance. The investment thesis centers on steady growth in the aerospace and defense segments, with particular emphasis on the underappreciated scale and diversification of the aerospace business. Management execution appears exceptional, particularly in successfully integrating a recent acquisition, which demonstrates both operational competence and strategic vision. The managers identify a secular tailwind in worldwide commercial aviation fleet growth that should benefit RBC's aerospace exposure over the long term. The company's highly engineered precision bearings suggest a differentiated product offering with potential pricing power and customer stickiness. RBC's diversified end-market exposure across industrial, defense, and aerospace provides both growth opportunities and defensive characteristics. The combination of strong management execution, secular growth drivers, and market underappreciation creates an attractive risk-adjusted return profile.

Pitch Summary:
Another large contributor was Dutch Bros., Inc. (BROS), a drive-through coffee company in the U.S. that serves customizable hot, iced and blended beverages. Strong fundamentals continue to lift the stock higher. In February, the company announced quarterly revenue and earnings growth that exceeded expectations and announced plans to open more than 150 new stores in 2025. While we like the concept of Dutch Bros.' stores, the stock has risen substantially in the short time we owned it, and we trimmed the position after those gains.

BSD Analysis:
Wasatch's investment in Dutch Bros proved successful as strong fundamental execution drove significant stock appreciation in a short timeframe. The managers highlight the company's ability to consistently exceed revenue and earnings expectations, demonstrating operational excellence in the competitive coffee retail space. The aggressive expansion plan of 150+ new stores in 2025 indicates management confidence in the business model's scalability and unit economics. Dutch Bros' drive-through format and customizable beverage offerings appear to resonate with consumers, creating a differentiated market position. However, the managers' decision to trim the position after substantial gains suggests disciplined valuation management rather than unlimited conviction. This approach indicates they recognize the stock may have reached fair value despite continued positive fundamentals. The quick success of this investment demonstrates their ability to identify emerging growth concepts in consumer discretionary sectors.

Pitch Summary:
The top contributor to the strategy's performance was Intra-Cellular Therapies, Inc. (ITCI). The pharmaceutical company's stock was up after news that Johnson & Johnson was acquiring it for $14.6 billion. We like the potential of Intra-Cellular's groundbreaking drug Caplyta, and while we don't hold a position based on a view a business will be acquired, we weren't surprised that Intra-Cellular was an attractive acquisition candidate given the drug's potential. After the news, we sold out of the position.

BSD Analysis:
Wasatch's successful investment in Intra-Cellular Therapies culminated in a $14.6 billion Johnson & Johnson acquisition, validating their thesis on the company's groundbreaking drug Caplyta. The managers emphasize they didn't invest based on acquisition speculation but rather on the fundamental value of Caplyta's therapeutic potential. Their lack of surprise at the acquisition suggests they recognized the strategic value that would attract large pharmaceutical companies seeking innovative CNS treatments. The decision to sell the entire position post-acquisition demonstrates disciplined capital allocation, likely capturing the full takeover premium. This successful outcome highlights their ability to identify undervalued biotech assets with breakthrough therapies before the broader market recognizes their strategic value. The Caplyta drug appears to have significant commercial potential, as evidenced by J&J's willingness to pay a substantial premium for the asset.

Pitch Summary:
Another detractor was Freshpet, Inc. (FRPT), a company that sells fresh, refrigerated meals and treats for dogs and cats. Revenue growth was a little lower than the market expected in Freshpet's most recently reported quarter, but we believe the stock-price reaction was overdone. We spoke with management after the earnings call and have done our own analysis of Freshpet's revenue streams. Based on our own analysis, we believe the company's growth over the next several years will be far more durable than the market expects. Additionally, as the company scales, we believe gross margins will increasingly benefit from more resilient and predictable demand, leading to more efficient manufacturing.

BSD Analysis:
Wasatch views Freshpet's recent stock decline as an overreaction to modest revenue growth disappointment, demonstrating contrarian conviction backed by proprietary research. The managers conducted independent revenue stream analysis and engaged directly with management post-earnings, indicating thorough due diligence beyond surface-level metrics. Their bullish thesis centers on durable multi-year growth prospects that they believe the market underappreciates. The investment case includes both top-line growth durability and margin expansion through operational leverage as the company scales. The managers identify a virtuous cycle where scaling operations create more predictable demand patterns, leading to manufacturing efficiencies and gross margin improvement. This operational leverage thesis suggests they view Freshpet as approaching an inflection point where growth quality and profitability both accelerate, making current weakness an attractive entry opportunity.