Investment Pitches

Pitch Summary:
Healthpeak Properties (DOC), is a healthcare-focused real estate investment trust (REIT) that develops, owns and manages medical office buildings, senior housing assets and life science facilities. Following an industry-wide life sciences building boom that created a supply/demand imbalance, DOC is poised to benefit from improved lease rates with its properties as excess industry capacity is absorbed. A solid fundamental backdrop for the demographically driven senior housing portfolio and stability within its medical office building portfolio should allow the company to produce improved financial performance over the next several years.

BSD Analysis:
Aristotle Capital added Healthpeak Properties, betting on recovery in life sciences real estate and demographic tailwinds in senior housing. The fund believes DOC is well-positioned as excess life sciences capacity gets absorbed, leading to improved lease rates and occupancy. The life sciences building boom created oversupply, but as this normalizes, DOC's high-quality properties should benefit from tightening markets. The senior housing portfolio benefits from favorable demographics as the aging population drives demand. Medical office buildings provide stability and defensive characteristics. The investment thesis combines cyclical recovery in life sciences with structural demographic trends in senior housing. The fund expects improved financial performance as supply/demand dynamics normalize and demographic trends accelerate. This represents a diversified healthcare REIT play with multiple improvement catalysts.

Pitch Summary:
Columbus McKinnon (CMCO), is a designer and manufacturer of a variety of material handling products and industrial lifts. The company is expected to benefit from a cyclical rebound in demand following a period of subdued performance as well as the harvesting of investments they've made over the past several years in faster growing, higher margin intelligent motion solutions (conveyance and automation).

BSD Analysis:
Aristotle Capital initiated a position in Columbus McKinnon, anticipating both cyclical recovery and benefits from prior strategic investments. The company manufactures material handling equipment and industrial lifts, markets that have experienced weakness but are positioned for rebound. CMCO has invested heavily in intelligent motion solutions, including conveyance and automation technologies, which offer higher margins and faster growth than traditional products. The fund expects the company to harvest returns from these investments as demand recovers. This represents a classic industrial cyclical play with a technology upgrade story. The combination of cyclical tailwinds and product mix improvement toward higher-value solutions should drive improved financial performance. The investment thesis relies on both external market recovery and internal portfolio transformation paying off.

Pitch Summary:
Axalta Coating System (AXTA), is a global manufacturer, marketer and distributor of high-performance liquid and powder coating solutions for commercial and light vehicle, industrial and aftermarket refinishing. In addition to an expected cyclical rebound in demand for the company's products, self-help initiatives implemented by a new management team will likely drive stronger revenue and earnings growth over the next several years.

BSD Analysis:
Aristotle Capital added Axalta Coating System to the portfolio, betting on both cyclical recovery and management-driven improvements. The fund expects a rebound in demand for the company's coating solutions across automotive and industrial end markets. New management has implemented self-help initiatives that should drive operational improvements and margin expansion. The investment thesis combines cyclical tailwinds with company-specific turnaround potential under new leadership. AXTA operates in specialty chemicals with exposure to automotive production and industrial maintenance markets. The fund anticipates stronger revenue and earnings growth as both external demand recovers and internal efficiency measures take effect. This represents a classic value play on operational improvement during a cyclical upturn.

Pitch Summary:
Americold Realty Trust (COLD), a global leader in temperature-controlled logistics, offering innovative technology-oriented supply chain and cold storage solutions to food producers, processors, distributors, and retailers was added to the portfolio. We believe that company-specific productivity initiatives coupled with strong industry dynamics are underappreciated by the market and not reflected in our estimate of the current valuation.

BSD Analysis:
Aristotle Capital initiated a position in Americold Realty Trust, viewing the cold storage REIT as undervalued by the market. The fund believes the company's productivity initiatives and favorable industry dynamics are not properly reflected in the current stock price. As a global leader in temperature-controlled logistics, COLD operates in a specialized niche with high barriers to entry and growing demand from food supply chain participants. The investment thesis centers on operational improvements and structural industry tailwinds that should drive improved financial performance. The fund sees this as a value opportunity where fundamental improvements are not yet recognized by investors. Cold storage demand continues to grow with e-commerce food delivery and changing consumer preferences toward fresh and frozen foods.

Pitch Summary:
Our other notable new holding is CBL & Associates Properties, Inc. I consider CBL another expression of our "long-term commercial property recovery" theme, where we seek to buy fundamentally sound real estate that will benefit from gradually improving sentiment. CBL is an operator of traditional malls, outlet malls, open air shopping centers, and lifestyle properties. CBL entered bankruptcy during the COVID crisis, shedding debt and reemerging in 2021. There's no question that the mall business is not what it used to be, but CBL has done an admirable job in reducing leverage, investing in its best properties, and returning capital to shareholders. Today, CBL owns a portfolio of 87 properties and manages 4 others for third parties. The portfolio ranges in quality from "Class A-ish" malls doing $500+ of annual sales per square foot, to challenged properties in tertiary markets. CBL's value is concentrated in its best properties, but the lower-quality properties still produce cash and the company is actively marketing some for sale. I value CBL shares at $40-45. At $28, CBL trades at an attractive discount to fair value, but I am also attracted by the low downside risk. The company has almost $9 per share in excess cash and owns a collection of properties totally unencumbered by debt. These properties produced $66 million in 2023 cash flow. At 7x cash flow, these properties are worth another $15 per CBL share. Together with the cash, that's value of $24 per share before considering any of the debt-encumbered properties. And there is plenty of value there, too. Some of CBL's properties are owned by a holding company that carries a term loan of $730 million. As long as these properties are worth more than 5.5x cash flow, CBL's equity in the holding company has value. CBL also has numerous properties with non-recourse property debt. Some of these properties are not currently cash-flowing for CBL because their cash flow is insufficient to satisfy their debt service ratios. These represent pure optionality for CBL. Either things don't improve and CBL hands the keys to the lenders, the lenders agree to restructure the debt and the properties become cash-flowing again, or property performance improves and the debt service issue is resolved. There's no way these properties can be actual liabilities for CBL, and plenty of ways they can have value again. CBL's best properties are mainly held through joint ventures with other operators. The company is working to consolidate some of these, and just announced the purchase of its JV partners' interests in three malls in Nashville, Kansas City, and St. Louis. Like our other commercial property holdings, CBL & Associates Properties has its fair share of challenges. But there are plenty of encouraging signs. CBL's net operating income was steady from 2023 to 2024, and occupancy ticked higher in the third quarter. The company's debt burden is very manageable and shrinking monthly from scheduled amortization and property sales. It's unlikely that investors will wake up tomorrow, decide malls are the future of commerce, and bid CBL shares to $80 or $100. But I do think the combination of strong cash flow, continued debt reduction, strategic reinvestment in CBL's best assets, and healthy distributions and share repurchases will drive shares higher this year and next.

BSD Analysis:
Waters presents CBL as a post-bankruptcy recovery play with compelling risk-adjusted returns and significant downside protection. The company emerged from COVID-era bankruptcy with a cleaned-up balance sheet and has demonstrated disciplined capital allocation through debt reduction and shareholder returns. Waters' sum-of-the-parts analysis reveals substantial value with $9 per share in excess cash plus unencumbered properties worth $15 per share, providing $24 of value before considering debt-encumbered assets. At $28, shares trade near this conservative floor with significant optionality from improving mall fundamentals. The portfolio spans quality levels from Class A malls generating $500+ per square foot to challenged properties that provide pure upside optionality. Recent operational improvements include steady NOI and rising occupancy, while the company actively consolidates joint venture interests. Waters' $40-45 target suggests 43-61% upside potential. The investment benefits from non-recourse debt structures that limit downside while providing upside participation in any retail real estate recovery.

Pitch Summary:
The fund's most significant new holding is Titan Cement International SA. It's no secret we're cement fans here at Alluvial HQ. Monarch Cement, Boston Sand & Gravel, and Cementos Argos SA are all fund holdings and all have treated us very well. A wave of infrastructure investment, combined with a long period of underinvestment in domestic cement production capacity have resulted in heady times for American cement producers, with most reporting record profits and a healthy outlook. Valuations have risen in tandem with results, and the industry now trades at 9-12x EBITDA or even higher, depending on size, location, and product mix. This optimism has not extended to cement producers in Europe, many of which are valued at 5-7x EBITDA. This includes Titan Cement, a Greek company with operations in Southern and Southeastern Europe, Egypt, Turkey, and a joint venture in Brazil. Oh, and a large US business that contributes more than half of the company's revenue and earnings. Titan Cement got tired of its depressed valuation and decided to do something about it. Seeing that US cement producers are valued at a premium of 50% or more to European cement producers, Titan decided to IPO a portion of its US business. "Titan America SA" will soon list on the NYSE. Titan shares have responded well to the news, but they remain attractively priced. Assuming Titan America SA is valued at 8-9x EBITDA, the market is still ascribing nearly zero value to Titan's profitable non-US operations. Titan has not yet discussed its plan for the cash influx it will receive from the partial divestiture of Titan America, but the company has a history of good financial stewardship. Titan Cement International SA shares trade in Athens and Brussels at around €44, but are worth at least €60.

BSD Analysis:
Waters identifies a compelling valuation arbitrage opportunity in Titan Cement, where the market fails to recognize the value of a US cement business trading at European multiples. With US cement producers commanding 9-12x EBITDA versus European peers at 5-7x, Titan's planned NYSE listing of its US operations should unlock significant value. The US business contributes over half of revenues and earnings, yet the market appears to ascribe minimal value to profitable non-US operations. Waters' €60 target versus the current €44 price suggests 36% upside potential. The investment benefits from strong cement market fundamentals driven by infrastructure investment and capacity constraints. The upcoming IPO serves as a clear catalyst for value realization, while management's track record of financial stewardship provides confidence in capital allocation. This represents a classic sum-of-the-parts opportunity where geographic valuation disparities create an attractive entry point.

Pitch Summary:
McBride is our British private label soaps and detergents manufacturer that got itself in hot water thanks to surging COVID-era input costs. We invested as it was becoming clear that McBride had turned the corner, getting its margins under control thanks to efficiency initiatives and amended customer contracts, and rapidly reducing debt. Shares rallied after our purchase, but slumped all summer as a procession of downbeat economic news from across the Atlantic and continued disinterest in the UK stock market took their toll. The slide was nothing short of perplexing to me, as McBride is about as defensive as a company can be. A moribund British and Continental European economy is good for McBride as it results in stressed consumers trading down from name brand cleaning products to private labels. We added to our position all summer and fall, building our Alluvial Fund holdings to 3 million McBride shares. McBride's January 17 first half trading update was, as the Brits might say, "cracking." The company revealed strong volume growth and operating income up 8% year-over-year. Net debt fell to a new low of 117.6 million, and the company indicated it would resume paying dividends next fiscal year. Shares promptly rallied from GBp 101 to GBp 117. Even after the move, McBride trades at only 3.6x EBITDA and just 5 times forward earnings. There is plenty of room for McBride shares to climb before reaching fair value. McBride shares are a bargain anywhere below GBp 200.

BSD Analysis:
Waters presents McBride as a defensive turnaround story that has successfully navigated COVID-era margin pressures through operational improvements and contract renegotiations. The investment benefits from counter-cyclical dynamics where economic weakness drives consumer trade-down to private label products, McBride's core market. Recent results validate the thesis with 8% operating income growth, strong volume increases, and debt reduction to new lows at £117.6 million. The company's return to dividend payments signals management confidence in the recovery. At 3.6x EBITDA and 5x forward earnings, the valuation appears compelling for a defensive consumer staples business. Waters' £2.00 target price suggests significant upside from current levels around £1.17. The defensive nature provides downside protection while the operational improvements and market share gains in private label drive earnings growth. This represents a classic value play in an overlooked UK small-cap with improving fundamentals.

Pitch Summary:
Zegona is a London-listed investment company that undertook a leveraged buyout of under-performing Spanish telecom, Vodafone Spain. In my last letter, I outlined the initiatives that Zegona would pursue to improve profitability and optimize the balance sheet. I am pleased to report that excellent progress is being made, and that Zegona shares have responded accordingly. The company's September 30 report showed stabilizing revenues and greatly improved cash flow. The planned sale of Vodafone Spain's fiber-optic assets is moving ahead nicely, with both deals expected to be completed in the first half of 2025. Following the asset sale, Zegona will pay down a substantial portion of its acquisition debt and will likely declare a large shareholder distribution. Despite the healthy move in Zegona Communications shares, the company trades at less than half my estimate of fair value. The company's operational turnaround is still in the early stages, and the complicated financials makes the ongoing value creation easy to miss. With multiple catalysts on the horizon, I have Great Expectations for Zegona.

BSD Analysis:
Waters presents Zegona as a successful turnaround story following its leveraged buyout of underperforming Vodafone Spain. The investment thesis centers on operational improvements already showing results through stabilizing revenues and improved cash flow generation. Key catalysts include the planned sale of fiber-optic assets in H1 2025, which will enable substantial debt reduction and likely trigger significant shareholder distributions. Waters believes the market is undervaluing the transformation, with shares trading at less than half his fair value estimate due to complex financials that obscure the value creation. The operational turnaround remains in early stages, suggesting continued upside potential. This appears to be a classic private equity-style value creation play where operational improvements, balance sheet optimization, and strategic asset sales will unlock shareholder value. The multiple near-term catalysts provide clear milestones for value realization.

Pitch Summary:
Alluvial Fund's largest holding remains Net Lease Office Properties, an ongoing liquidation story. The speed with which Net Lease has sold off properties and paid down its debt is impressive. Just six months ago, the company owned 47 properties and carried recourse debt of $215 million. Today, Net Lease is down to 39 properties and $61 million in recourse debt. I expect the company's remaining recourse debt to be extinguished this quarter or next, allowing the company to begin distributing the proceeds of its property sales to shareholders. Net Lease shares have performed very well since we first started buying them one year ago, but their price remains deeply discounted against any reasonable estimate of asset value. The headwinds facing the office market have scarcely abated, and interest rates are being stubbornly slow to decline, but if Net Lease can continue selling its properties at 8-12% cash flow yields, eventually there will be nothing left to sell and shareholders will have received far more than the current trading price in distributions. Lest anyone think I am being too sanguine about Net Lease's prospects, I do make allowance for the fact that some lower quality or "quirkier" properties may prove difficult to sell or fetch disappointing prices. The company's largest remaining property, a 1 million square foot Houston building leased to KBR, might be one such property. It's an older building in an office market with high vacancy. Hard to imagine the list of interested buyers is currently very long or feeling very spendy. On the plus side, KBR's lease runs for another 5.4 years, and Net Lease will receive another $115 million in rents. Discounted at 10%, that's a present value of $86 million. It's very possible that the Houston office market will improve by 2030 and that the building will have significant terminal value. But even if the property is totally worthless in five years (unlikely), the present value of remaining contractual rent payments alone is $80 per square foot. If I repeat this process with Net Lease's other "difficult" properties, applying punitive outcomes, I still get to a value per Net Lease Office Properties share in the high $30s. My "realistic scenario" valuation remains $45 per share.

BSD Analysis:
Waters presents a compelling liquidation thesis for Net Lease Office Properties, emphasizing the company's rapid debt reduction from $215 million to $61 million in just six months while selling properties at attractive 8-12% cash flow yields. The manager demonstrates thorough analysis by stress-testing the portfolio's most challenging asset - a 1 million square foot Houston KBR-leased building - and still arrives at a conservative valuation in the high $30s even under punitive scenarios. His realistic scenario target of $45 per share suggests significant upside from current levels. The investment benefits from contractual cash flows providing downside protection, with KBR's 5.4-year lease alone worth $86 million in present value. Waters acknowledges office market headwinds but positions this as a pure liquidation play where asset sales will eventually return substantial cash to shareholders. The thesis relies on management's continued ability to monetize properties at reasonable valuations. This appears to be a classic sum-of-the-parts opportunity with limited downside given the contracted rental income.

Pitch Summary:
As a reminder, Topicus is a Dutch company that acquires, manages, and builds vertical market software (VMS) businesses, primarily in Europe. These businesses provide mission-critical software solutions tailored to the specific needs of customers within particular vertical markets. Topicus was spun off from Constellation Software, a Canadian company, in February 2021. It was established as an independent, publicly traded entity and merged with Total Specific Solutions (TSS), a key player in the European VMS sector. We initiated our position in Topicus shortly after its spin-off in March 2021. Since then, our Internal Rate of Return (IRR) on this investment has been 16%—a satisfactory rate, though below the company's impressive fundamental performance over the same period (see table below). Revenues and operating income have grown at a robust 21% annual rate, while operating cash flow per share has increased by 18% annually. The primary reason for the gap between our IRR and Topicus's fundamentals is a modest compression in valuation multiples. This decline reflects tempered growth expectations as the pace of acquisitions has recently slowed. This slowdown suggests to us that management is being disciplined in the current environment and finding fewer attractive acquisition opportunities. We have confidence in the management team's judgment and expect them to maintain their disciplined acquisition strategy. Looking ahead, we anticipate growth to reaccelerate over the next several years as the company continues to identify and execute on high-quality opportunities in the European VMS sector.

BSD Analysis:
Rowan Street's investment in Topicus reflects confidence in the vertical market software acquisition model pioneered by Constellation Software. Despite a 16% IRR that trails the company's impressive 21% revenue and operating income growth, the fund views the valuation compression as temporary and attributable to a disciplined management approach during challenging acquisition conditions. The company's focus on mission-critical software solutions in specific European verticals provides defensive characteristics and recurring revenue streams. Management's recent slowdown in acquisitions demonstrates capital discipline rather than operational weakness, positioning Topicus for accelerated growth when attractive opportunities emerge. The 18% annual growth in operating cash flow per share underscores the quality of the underlying software businesses and their cash-generative nature. As a Constellation Software spinoff, Topicus benefits from proven acquisition expertise and operational best practices in the VMS sector. The fund expects growth reacceleration as the European VMS market presents renewed acquisition opportunities for disciplined capital allocation.

Pitch Summary:
Our IRR for Shopify aligns closely with the growth in revenues and gross profits the company has delivered over the past three years since we first purchased it in February 2022 (as shown in the table below). However, the path to achieving this return has been far from smooth—as is often the case with investments. In fact, for the first 2.5 years of holding Shopify, our position generated little to no return. Nearly all of the gains have come within the past six months. This illustrates a fundamental principle of long-term investing: the longer your holding period, the more closely your returns will reflect the underlying fundamentals of the business. Looking ahead, Shopify is expected to grow its revenues and gross profits at rates north of 20% annually over the next two years, with cash flow from operations projected to grow in the high 20s as the company continues to convert more of its revenues into cash. While Shopify's valuation multiples remain lofty—as they almost always do—this reflects Mr. Market's recognition of the massive opportunity the company has in the e-commerce space. Even if market enthusiasm for Shopify's long-term growth moderates in the coming years, which we expect it likely will, we still anticipate generating respectable double-digit annual returns from this investment.

BSD Analysis:
Rowan Street's Shopify investment exemplifies the patience required for long-term value creation, with the 23% IRR materializing primarily in the past six months after 2.5 years of minimal returns. The fund's thesis centers on Shopify's ability to capitalize on the massive e-commerce opportunity, with expected revenue and gross profit growth exceeding 20% annually. Particularly compelling is the projected cash flow from operations growth in the high 20s, indicating improving operational efficiency and cash conversion. The manager acknowledges Shopify's consistently lofty valuation multiples but views this as market recognition of the company's long-term growth runway in e-commerce infrastructure. Despite expecting potential moderation in market enthusiasm, the fund anticipates respectable double-digit annual returns based on fundamental business performance. Shopify's position as a leading e-commerce platform provider offers significant exposure to the ongoing digital transformation of retail. The investment demonstrates the fund's conviction in holding quality businesses through periods of market indifference.

Pitch Summary:
TheTradeDesk has been our most successful investment to date. March 2025 will mark five years since we opportunistically initiated our position at a cost basis of $17.40 (split-adjusted). Since then, TTD has appreciated more than sevenfold, delivering an annualized return of approximately 54%. These exceptional results far outpace the company's strong fundamental growth, with revenues and earnings compounding at approximately 25% annually over this period (refer to the table below). The primary reason for this outsized return lies in the price at which we were able to acquire TTD during the early days of the pandemic, when market fears briefly drove it down to just 10x revenues. Today, the valuation has expanded significantly to approximately 25x revenues, amplifying our returns. This investment underscores the critical importance of opportunistic entry points. While identifying extraordinary businesses is essential, the price you pay for them does matter. Looking ahead, TTD is expected to grow its revenues, earnings, and free cash flow at rates north of 20%. While the stock's current valuation is lofty and reflects significant enthusiasm for the company's long runway for growth, we believe its strong fundamentals will drive solid returns over time. Even if valuation multiples were to compress, which we expect they might, we still anticipate a solid return from our position—potentially doubling our investment over the next five years.

BSD Analysis:
The Trade Desk represents Rowan Street's most successful investment, delivering a remarkable 54% annualized return over five years from an opportunistic entry point during pandemic market volatility. The fund capitalized on market fears that temporarily drove the stock to 10x revenues, well below its current 25x multiple. While the 54% return significantly outpaces the company's strong 25% annual revenue and earnings growth, the manager acknowledges that valuation expansion contributed meaningfully to outperformance. Looking forward, TTD is expected to maintain robust growth above 20% in revenues, earnings, and free cash flow. The manager demonstrates realistic expectations, anticipating potential multiple compression while still projecting the investment could double over the next five years. The Trade Desk's position in programmatic advertising and data-driven digital campaigns provides a strong competitive moat in the evolving advertising technology landscape. This investment exemplifies the fund's strategy of identifying exceptional businesses and capitalizing on opportunistic entry points.

Pitch Summary:
Our IRR for Spotify, while solid, has been influenced by the timing and size of our investments. Over the past six years, the company has achieved exceptional growth in users, revenues, and gross profits—as highlighted in the chart below. However, our IRR does not fully reflect this growth due to the cash flows involved in building our position. We began buying Spotify shares in 2018 at an initial cost basis of $135 per share but continued to add to the position over the years, ultimately raising our average cost basis to $216 per share. Had we maintained our initial cost basis, the IRR on this investment would have been closer to 22%, which better aligns with Spotify's fundamental growth in key metrics such as Monthly Active Users (MAU), revenues, and gross profits. In early December, we published an article titled, From $15 Billion to $100 Billion: Lessons from Our Spotify (SPOT) Investment, and we encourage you to review it for additional insights into this investment.

BSD Analysis:
Rowan Street demonstrates strong conviction in Spotify despite a 14% IRR that understates the company's fundamental performance due to position-building timing. The fund has achieved exceptional growth in Monthly Active Users, revenues, and gross profits over six years, with the manager noting that maintaining their initial 2018 cost basis would have yielded a 22% IRR more reflective of business fundamentals. The investment thesis centers on Spotify's ability to scale its audio streaming platform and monetize its growing user base. The fund's willingness to average up from $135 to $216 per share demonstrates confidence in the long-term value creation potential. Spotify's transition from a music streaming service to a broader audio platform positions it well for continued growth in the digital entertainment space. The manager's detailed analysis in their dedicated Spotify article suggests deep conviction in the company's trajectory toward a $100 billion valuation.

Pitch Summary:
For META, our 22% IRR aligns closely with the company's compounded growth in earnings per share (EPS) and free cash flow per share during the six-year holding period, as shown below: Looking ahead, Meta is expected to grow its revenues, earnings, and free cash flow per share at mid-teens rates over the next two years. There's a good possibility that it could exceed these estimates, considering the breadth of growth initiatives currently in place, such as advancements in AI, monetization of Reels, expansion into business messaging, and the ongoing development of the metaverse. We've written extensively about Meta Platforms (META) over the past few years. For a deeper dive into our thoughts and analysis, we encourage you to review our November 2022 Note: Does a $750 billion decline in Meta's market cap make sense? and our Q3 2023 Letter: Meta Platforms (META): $550 billion rebound in market cap in less than a year.

BSD Analysis:
Rowan Street maintains a bullish stance on Meta Platforms, highlighting their 22% IRR over a six-year holding period that closely aligns with the company's fundamental growth in EPS and free cash flow per share. The fund expects Meta to deliver mid-teens revenue and earnings growth over the next two years, with potential upside from multiple growth catalysts. Key drivers include AI advancements, Reels monetization, business messaging expansion, and metaverse development. The manager's confidence is reinforced by Meta's historical ability to compound earnings and cash flow, suggesting the business fundamentals support the stock's performance. The fund has maintained conviction through market volatility, as evidenced by their extensive previous coverage of the investment. Meta's diversified growth initiatives position it well for sustained outperformance in the digital advertising and social media landscape.

Pitch Summary:
Amidst growing negativity during the year, compounded by significant Japanese yen volatility in the middle of 2024, we added a third auto manufacturing company, Subaru. Had we held Subaru from the beginning of the year, it too would likely have made the list of top detractors. We do expect BMW, as well as Mercedes-Benz Group and Subaru, to continue to grow and compound shareholder value in the future but the status quo performance alone, without improvement and growth, represents a very attractive investment proposition, in our view. Recent commentary from BMW's management and adjustments to capital return plans should be viewed as an acknowledgment that the company is over-capitalized, which can also be said for Subaru and Mercedes-Benz. In other words, financial distress does not factor in this discussion and other sources of perceived existential threat must be at play. In a word, perceiving current industry challenges as potentially existential for BMW, Mercedes-Benz, and Subaru seems an incredible stretch. Subaru, however, is a niche producer of approximately one million cars per year priced at mass market levels but sold to a fairly affluent customer base. Also, idiosyncratic to Subaru is that North American volumes represent nearly 70% of Subaru's business, with the U.S. representing the vast majority of those volumes. During 2024, Subaru volumes in the U.S. rose 5.6% versus 2023, outperforming the broader U.S. car market, which rose about 2.3% versus 2023. What is also interesting about the 2024 U.S. performance data, for Subaru in particular, is that its inventory levels have been managed incredibly well relative to peers. The same can also be said for its much larger affiliated company Toyota Motor, which owns 20% of Subaru. Toyota carries the torch of defining automotive strategy for Japanese auto companies and was pilloried as recently as a couple of years ago for its unwillingness to fully commit to a strategy that would see internal combustion engines ("ICE") disappear from its product mix, in favor of BEVs, in the medium term. They, and Subaru along with them, have taken a more cautious approach that is designed to produce the types of products demanded by dealers and customers within their most relevant geographies. For Subaru, the commercial focus is on the U.S. and Japan. Alternative approaches, carried out by European mass-market producers especially, have seen North American inventories pile up. The result has been heavy price discounting, in order to move less demanded models that were pushed into the market by manufacturers rather than pulled by customers. When Subaru reports results in coming weeks, we would expect results to reflect resilient volumes, relatively little price discounting, and more help from a weak Japanese yen than was anticipated in earlier forecasts. As mentioned, Subaru has spent relatively little and developed relatively little to date, with only one BEV model currently available, representing a tiny percentage of its vehicles sold. This deliberate, and so far, successful strategy is a response to its North American and Japanese geographic focuses, where BEVs have limited demand and where the fear of regulatory penalties is lower. In Japan, which represents roughly 20% of Subaru's volumes, BEVs are virtually non-existent. For Subaru, this discussion is largely moot unless Chinese passenger vehicles begin arriving in the U.S. and Japan in large numbers, which seems improbable today. Capital was redeployed into both BMW and Subaru, as well as Japanese small-cap companies Paltac and Horiba.

BSD Analysis:
Third Avenue initiated a position in Subaru during 2024, viewing it as an attractive contrarian opportunity amid automotive sector pessimism and yen volatility. The fund appreciates Subaru's unique positioning as a niche producer serving an affluent customer base with mass-market pricing, generating strong customer loyalty. Subaru's geographic concentration (70% North America, 20% Japan) provides strategic advantages, with U.S. volumes growing 5.6% in 2024 versus 2.3% for the broader market. The company's disciplined inventory management contrasts favorably with European competitors facing discounting pressures. Subaru's cautious EV approach, influenced by Toyota's 20% ownership, appears prescient given limited BEV demand in its core markets. The fund views Subaru as over-capitalized rather than distressed, similar to other automotive holdings, suggesting potential for enhanced shareholder returns. The company's focus on customer-driven rather than manufacturer-pushed product development has resulted in pricing power and operational efficiency. Third Avenue expects continued resilient volumes, minimal discounting, and yen tailwinds to support performance, while viewing current industry challenges as manageable rather than existential threats.

Pitch Summary:
During 2024, two of the ten largest detractors from Fund performance were automobile manufacturers we have owned for several years, namely BMW and Mercedes-Benz Group. We do expect BMW, as well as Mercedes-Benz Group and Subaru, to continue to grow and compound shareholder value in the future but the status quo performance alone, without improvement and growth, represents a very attractive investment proposition, in our view. Over the same period, Mercedes-Benz Group has produced a total shareholder return, in U.S. dollars, of 9.55% annualized. This is the net result of producing fairly strong operating results, challenges notwithstanding, that have been sufficient to outweigh the valuation multiple declines. Recent commentary from BMW's management and adjustments to capital return plans should be viewed as an acknowledgment that the company is over-capitalized, which can also be said for Subaru and Mercedes-Benz. In other words, financial distress does not factor in this discussion and other sources of perceived existential threat must be at play. In a word, perceiving current industry challenges as potentially existential for BMW, Mercedes-Benz, and Subaru seems an incredible stretch. BMW and Mercedes-Benz focus on selling luxury autos, for which demand has historically exhibited less sensitivity to macroeconomic conditions because of the financial health of their average customer. During 2024, Mercedes-Benz passenger vehicle volumes in the U.S. rose 8% versus 2023, outperforming the broader U.S. car market, which rose about 2.3% versus 2023. Mercedes-Benz, by comparison, has spent considerably but has had only lackluster results. In 2024, Mercedes-Benz BEVs sold were down 23% versus 2023, though its plug-in hybrid electric vehicle ("PHEV") sales rose 13%. BMW and Mercedes-Benz have both seen meaningful volume headwinds in China, but their luxury brands still confer cache and volume impacts have been a fraction of the impact on foreign manufacturers in total. Today, the Chinese market represents an estimated 30% of BMW's auto profit pool and Mercedes-Benz is in a similar range. First, if the entirety of BMW and Mercedes-Benz's Chinese profitability disappeared, the companies would still be trading at a single-digit multiple of earnings. For companies like BMW, which was famous for European sport sedans at that time, and Mercedes-Benz, which was famous for large luxury sedans, it seemed very unlikely that they would even dream of trying to compete in that arena, which demanded a fundamentally different vehicle architecture. Years later, not only were both companies in the market with successful products but both had built enormous SUV-dedicated U.S. manufacturing facilities on the back of huge luxury SUV success. Ironically, several foreign companies, BMW and Mercedes-Benz in particular, have very little net import exposure to the U.S. For both companies, their global SUV manufacturing hubs are in the southern U.S. from which they serve U.S. SUV demand but also export large volumes to global SUV customers. Both companies also import other models into the U.S. but, on a net basis, both companies are nearly neutral in terms of U.S. net imports and exports.

BSD Analysis:
Third Avenue maintains a bullish stance on Mercedes-Benz despite recent underperformance, viewing current challenges as temporary headwinds rather than structural threats. The fund emphasizes Mercedes' strong operational track record, generating 9.55% annualized total returns over five years despite valuation multiple compression. Mercedes' luxury positioning provides defensive characteristics against macroeconomic pressures, with U.S. volumes growing 8% in 2024 versus 2.3% for the broader market. While BEV sales declined 23%, PHEV sales rose 13%, indicating adaptability in the evolving powertrain landscape. The manager notes Mercedes appears over-capitalized rather than distressed, similar to BMW, suggesting potential for enhanced capital returns. Even if Chinese profits (30% of total) disappeared entirely, the company would trade at single-digit earnings multiples, highlighting the margin of safety. Mercedes' historical ability to successfully pivot from luxury sedans to SUVs demonstrates management's adaptability to market shifts. The fund views current valuations as attractive given the company's luxury brand equity, manufacturing footprint advantages, and potential for continued shareholder value creation.

Pitch Summary:
The largest of the Fund's auto investments has been, and remains today, BMW. Pessimism has been palpable and can be seen in the stark valuation multiples decline that BMW has experienced. During the last five years, from the end of 2019 through the end of 2024, BMW's price-to-earnings multiple declined by approximately 30%, to the present level of roughly 6.4x consensus estimates of forward earnings. The company's price-to-book-value multiple declined by roughly the same proportion to its current level of 54% of book value. During that same period, BMW produced an average annual return on equity of approximately 13.7%, while facing the challenges identified above. Additionally, that return on equity figure is almost identical to its average return on equity over the trailing ten-year period. Despite its "uninvestability" throughout these challenges, BMW has produced cumulative earnings per share of EUR 80.74 during the last five years (through 9/30/24), which is similar to its stock price today, paid out EUR 24.70 per share in dividends, and repurchased nearly 5% of its shares outstanding. The share repurchases have occurred almost entirely within the last two years and should be expected to continue. In this way, the most important variant perception may simply be a difference of opinion about what constitutes an attractive investment. We do expect BMW, as well as Mercedes-Benz Group and Subaru, to continue to grow and compound shareholder value in the future but the status quo performance alone, without improvement and growth, represents a very attractive investment proposition, in our view. One potentially counter-intuitive mathematical fact is that, notwithstanding the profound decline of valuation multiples experienced by BMW, its shares have still produced a total shareholder return of positive 6.02%, annualized, over the last 5 years, in U.S. dollar terms. Recent commentary from BMW's management and adjustments to capital return plans should be viewed as an acknowledgment that the company is over-capitalized, which can also be said for Subaru and Mercedes-Benz. In other words, financial distress does not factor in this discussion and other sources of perceived existential threat must be at play. In a word, perceiving current industry challenges as potentially existential for BMW, Mercedes-Benz, and Subaru seems an incredible stretch. During 2024, BMW volumes sold in the U.S. rose 6.5% versus 2023, outperforming the broader U.S. car market, which rose about 2.3% versus 2023. In the case of BMW specifically, the company was forced to enact a very large product recall in Q3 2024 to fix a faulty braking system supplied by Continental, creating a temporary but significant negative impact on production volumes, vehicles sold, and operating performance. It is nearly certain that volume growth would have been higher absent the recall. BMW, on the other hand, has spent considerably developing a new dedicated BEV architecture called Neue Classe. In 2024, BMW's global BEV volumes sold rose 13.5%, a year in which Tesla Motors, a BEV-only manufacturer, reported a year over year decline in global volumes sold. Amazing facts abound; according to Bloomberg consensus, BMW is expected to produce 56% more operating profit than Tesla in 2024, even with the massive BMW recall. From our vantage point, the jury has returned with a verdict. The fact that BMW has far higher global market share in BEVs that it has in internal combustion vehicles and is growing BEV volumes far faster than the world's most renowned BEV-native company completely dispels any notion that high-quality "legacy" manufacturers cannot compete in a BEV transition. BMW's commercial success has been so strong it almost begs for an accelerating BEV transition. Today, the Chinese market represents an estimated 30% of BMW's auto profit pool. For companies like BMW, which was famous for European sport sedans at that time, and Mercedes-Benz, which was famous for large luxury sedans, it seemed very unlikely that they would even dream of trying to compete in that arena, which demanded a fundamentally different vehicle architecture. Years later, not only were both companies in the market with successful products but both had built enormous SUV-dedicated U.S. manufacturing facilities on the back of huge luxury SUV success. All foreign auto companies recognize the game has changed in China and have technological and user-interface catching up to do. It seems very closed-minded to assume a company like BMW, which is now growing BEV volumes faster than Tesla Motors, cannot evolve and tailor its products to remain highly desired in the Chinese market, particularly given the company's past innovative success, its huge war-chest of financial resources, and a brand that continues to be highly desired globally. Ironically, several foreign companies, BMW and Mercedes-Benz in particular, have very little net import exposure to the U.S. It was these underlying details that encouraged BMW's CEO, Oliver Zipse, to make the curious comment that the company might be advantaged by broad U.S. auto import tariffs. For both companies, their global SUV manufacturing hubs are in the southern U.S. from which they serve U.S. SUV demand but also export large volumes to global SUV customers. Both companies also import other models into the U.S. but, on a net basis, both companies are nearly neutral in terms of U.S. net imports and exports. Capital was redeployed into both BMW and Subaru, as well as Japanese small-cap companies Paltac and Horiba.

BSD Analysis:
Third Avenue presents a compelling contrarian case for BMW, arguing the market has overreacted to automotive industry headwinds. The fund highlights BMW's remarkable operational resilience, maintaining 13.7% average ROE over five years while trading at just 6.4x forward earnings and 0.54x book value. Despite perceived "uninvestability," BMW generated EUR 80.74 in cumulative EPS over five years, returned EUR 24.70 in dividends, and repurchased 5% of shares, demonstrating strong capital allocation. The manager emphasizes BMW's competitive advantages in the EV transition, noting 13.5% BEV volume growth in 2024 versus Tesla's decline, and expects 56% higher operating profit than Tesla despite a major recall. BMW's luxury positioning provides resilience against interest rate sensitivity, while its U.S. manufacturing footprint actually benefits from potential tariffs. The fund views current valuations as disconnected from fundamentals, with the company appearing over-capitalized rather than distressed, positioning for continued shareholder value creation through both organic growth and capital returns.

Pitch Summary:
We also initiated a position in Krones, a German-based global leader in bottling, filling and labeling machinery for the beverage industry. Krones benefits from a dominant market share, technological leadership and strong relationships with top customers. While the company experienced order volatility during and shortly after the pandemic, demand has since stabilized. The current valuation appears to overly discount concerns about potential future volatility, making this an opportune time to invest in a resilient company operating in a stable industry.

BSD Analysis:
Diamond Hill initiated a position in Krones based on the company's dominant market position and attractive valuation following pandemic-related volatility. Krones maintains global leadership in beverage industry machinery with dominant market share, technological advantages, and strong customer relationships with top beverage manufacturers. These competitive moats provide pricing power and recurring revenue opportunities through equipment servicing and upgrades. The company's technological leadership ensures continued relevance as beverage production becomes more automated and efficient. While Krones experienced order volatility during the pandemic, demand stabilization indicates a return to normal business conditions. The manager believes current valuations overly discount future volatility concerns, creating an attractive entry point. The beverage industry's stability and long-term growth prospects support sustainable demand for Krones' equipment and services. The company's resilient business model and market leadership position it well to benefit from industry consolidation and emerging market growth.

Pitch Summary:
MAX Co. was another addition to the portfolio. The Japanese manufacturer specializes in pneumatic nailers, staplers and rebar-tying solutions for the construction and manufacturing industries. Its Twintier rebar-tying tools, which are faster and more efficient than traditional methods, represent a key growth driver for the company. With a strong balance sheet and a shift towards more shareholder-friendly capital allocation practices, we believe MAX Co. is undervalued relative to its growth and profitability potential.

BSD Analysis:
Diamond Hill added MAX Co. based on the company's specialized position in construction and manufacturing tools with innovative product advantages. The company's Twintier rebar-tying tools offer superior speed and efficiency compared to traditional methods, creating competitive differentiation and pricing power. This technological advantage represents a key growth driver in the construction industry where productivity improvements are highly valued. MAX Co.'s strong balance sheet provides financial flexibility and downside protection while supporting growth investments. The shift toward more shareholder-friendly capital allocation practices suggests improving corporate governance and returns to shareholders. The manager believes the company is undervalued relative to its growth and profitability potential, indicating an attractive risk-reward profile. MAX Co.'s specialized focus on pneumatic tools and fastening solutions creates niche market leadership with barriers to entry. The Japanese market exposure aligns with Diamond Hill's positive outlook on Japan's improving corporate governance environment.

Pitch Summary:
We initiated a position in Prosus NV, a Dutch-listed global technology investment company. Prosus focuses on high-growth sectors such as online classifieds, food delivery, payments, fintech, educational technology and online retail. Its most valuable asset is a significant stake in Tencent, providing exposure to the Chinese tech giant at a discount. Additionally, management is taking steps to reduce the stock price discount relative to the value of its underlying assets, making this an attractive opportunity.

BSD Analysis:
Diamond Hill initiated a position in Prosus based on its diversified exposure to high-growth technology sectors and attractive valuation relative to underlying assets. The company provides access to multiple secular growth themes including online classifieds, food delivery, payments, fintech, educational technology, and e-commerce. Prosus's most valuable holding is its significant stake in Tencent, offering indirect exposure to the Chinese internet giant at a discount to direct ownership. This structure provides access to Chinese technology growth while potentially mitigating some direct investment risks. Management's active efforts to reduce the holding company discount through strategic initiatives adds a catalyst for value realization. The diversified portfolio across multiple technology verticals provides exposure to various digital transformation trends. Prosus's global reach and local market expertise in emerging markets offer competitive advantages in high-growth regions. The manager's emphasis on the discount to underlying asset value suggests an attractive risk-adjusted entry point for accessing quality technology assets.