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Avatar Holdings Update

December 8, 2010

It has been too long since I have posted regularly. With the market gradually advancing over the past 3 months, attractive investment opportunities have become harder to find (at least for me). Thus, not a lot to post about new investment ideas, so I’ll just have to content myself with providing updates for some of the existing portfolio positions. This is more of an exercise for myself as I tend to become lazy about reviewing the operational status of my holdings on a regular basis, preferring instead to prospect for undiscovered gems. I’ll be keeping these short and limiting myself to what I view as the most salient developments. Please chime in if you have anything to correct or add.

Avatar Holdings (AVTR): 3rd quarter results were dismal along with the rest of the housing market; revenue was down and there continued to be a significant net loss, albeit at a lower run rate than the same quarter in the prior year. The company does, however, continue to have adequate cash reserves. Subsequent to the quarter end there were important corporate events. In October a new CEO was announced and the company acquired certain Florida and Arizona properties from JEN Partners. The acquisition was part stock (about 1 million newly issued restricted shares with a value of approx. $20 million plus an earn-out of an additional 400k shares),  part cash ($30 million) and part notes ($18 million with 1 and 2 year maturities). As might be expected, two board members were brought on from JEN Partners. Book value of the company was about $37/share at the end of the 3rd quarter, a decrease of about 5% from the $39/share at the beginning of the year. The cash position at the end of the 3rd quarter was some $46 million less than at the beginning of the year due to repayment of $56 million in notes, $6+million in land purchases and operating losses, offset by receipt of $33 million in income tax refunds. The October acquisition will reduce the cash balance even further from about $15/share at the end of the quarter to $11.40/share (including the newly issued shares) after the transaction. Lastly, an item to keep an eye on; the CFO resigned as of the end of his contract at the end of this year.

I continue to hold AVTR under the theory that the housing market will eventually turn and AVTR will be well positioned with a low-cost inventory structure. I may  increase my holdings if the share price falls below $17.

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