Changing Timberland Ownership Trends In The Usa

Changing Timberland Ownership Trends in the USA International Conference on Global Forest Products Markets September 9-10, 2003 Santiago, Chile

Robert Flynn Wood Resources International August 1, 2003

Discussion 

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Dis-integration of the forest industry corporation and sale of timberland Rapid growth of institutional investors in timber Tax benefits and other factors behind this trend Declining returns for timberland investors Conservation groups and timber investments

Forest Industry’s share of private timberland in the US peaked in the mid-1980s Percent of Private Timberland Owned by Forest Industry 25%

Percent

20% 15% 10% 5% 0% 1953 Source: US Forest Service

1977

1987

1997

2002

More than 8 million hectares of timberland have changed hands in the US since 1987 Major Timberland Transactions in the US, 1997 - 2003*

thousand hectares

2500 2000 1500 1000 500 0 1997 Source: Timberland Markets

1998

* 2003 pending sales 1999includes2000 2001

2002

20

Major Forest Products companies in the USA have been selling their forests 

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Georgia-Pacific: sold all 2.3 million hectares of their timberland International Paper: has sold or is currently selling 1.4 million hectares, 25% of ownership Bowater has sold 1.3 million hectares, or about 2/3 of their ownerhip Weyerhaeuser: sold close to 500,000 hectares, or 15% of total ownership (inc. Willamette) Louisiana-Pacific by the end of this year will have sold all of its 500,000 ha of timberland.

Most timberland transactions in the US have been in the Southern Pine Region Timberland Transactions in the USA, Percent of total area, 1996 - 2002 Northeast 35%

South 55% Pacific Northwest 10% Source: Timberland Markets

Who are the institutional investors in timberland? 

Public Pension Funds, such as   

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Private Pension Funds, such as   



CalPERS (Cal. Public Employees Retirement System) State teacher Retirement System of Ohio Washington State Investment Board General Motors Delta Airlines United Parcel Service

Foundations and Endowments, such as 

Harvard University, Yale University, and Hughes Medical Inst

Timber investments in the US have reached $16 billion, with institutional investors holding about $10 billion

Source: Hancock Timber Resource Group

2002

2000

Letter

1998

REITs

1996

MLPs

1994

1990

1988

Private Equity

1992

18000 16000 14000 12000 10000 8000 6000 4000 2000 0 '86

Million US $

Growth in Timberland Investments, 1986 - 2002

Institutional ownership has expanded to nearly 5.0 million hectares in the US Ownership of Timberland in the US by Institutional Investors

Million hectares

6 5 4 3 2 1 2000

1999

1998

1997

1996

1995

1994

1993

Source: Hancock Timber Resource Group

1992

1991

1990

1989

1988

1987

0

Institutional investments in timberlands in the US are managed by 12-15 “TIMOs” Company

Area

Assets

000 hectares

$ Million

1024 480 455 448 395 315 147 178 142 140 136 115 85 70 4130

2462 505 1180 1380 1490 1550 300 51 175 410 370 210 100 260 10443

Hancock Timber* Forestland Group Molpus Woodlands Wachovia Evergreen Forest Investment Assoc. Campbell Group Prudential Timber McDonald Investments Fountain Forestry Forest Systems TimberVest Forest Capital Renewable Resources (GMO) UBS Timber Total

* Hancock currently selling 340,000 ha of forest

Source: Timberland Markets

Only a few TIMOs have ventured outside North America, with UBS the clear leader Country

UBS

New Zealand

X

Australia

X

Chile

X

Brazil

X

Argentina

X

Uruguay

X

UK

Hancock

GMO

Pru-Timber Fountains

X X

X

X

X

X X

A number of factors have been encouraging the changes in timberland ownership 

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Most pension funds and endowments are tax-exempt, while corporations face “double-taxation” Public corporations need to maintain revenues, which may force them to sell more timber when prices are lower, or to sell timberland when other revenues down TIMOs not tied to processing facilities (usually), and can often take longer term perspective in selling timber Timberlands “under-valued asset” for corporations, who cannot take unrealized gains until timber sold Excellent marketing --- interpretation of a new financial asset class by TIMOs to diversify pension fund portfolios Initially, timber investments by this sector achieved high returns

Returns on timberland have been trending lower

Source: NCREIF

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

Appreciation Op. EBITDA

1988

40 35 30 25 20 15 10 5 0 -5 -10 -15

1987

Percent

NCREIF Timberland Index Returns, 1987 - 2002

Source: NCREIF

2002

2001

2000

1999

Pacific Northwest

1998

1997

1996

1995

1994

1993

1992

1991

1990

1989

South

1988

80 70 60 50 40 30 20 10 0 -10 -20

NCREIF Timberland Index Total Returns by Region

1987

Percent

Timberland Returns have been heavily influenced by early gains in the PNW

Long-term returns on timber have been impressive, but more recently… NCREIF Timberland Index, Total Returns, USA 0.25

22.5%

Percent

0.2

16.1%

0.15

10.4%

0.1 4.6% 0.05 0

1987 - 2002

Source: NCREIF

1987 - 1996

1993 - 2002

1998 - 2002

Of course, relative to timber investments in some regions, the US looks impressive UK Conifer Stumpage Index, 1973 - 1999 UK Conifer Stumpage Index (1996=100)

400 350

1973 - 1999 = - 6.3% real per year

300 250 200 150 100 50

Year Ending

Source: DANA Ltd

99

97

95

93

91

89

87

85

83

81

79

77

75

73

71

0

Outlook for timber investing?  

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Declining returns Large amount of corporate forestland on the market Some major institutional investors also now major sellers TIMO funds reaching maturity and will also place more forest on the market Will there be enough buyers????

Conservation groups were among the largest purchasers of timberland in 2002 Major Timberland Buyers and Sellers in the US, 2002 600 400

-1000 -1200Source: Timberland Markets

Stora Enso

Bowater

Great Northern

LP

Wachovia

Molpus

FIA

Weyerhaeuser

-800

Forestland

-600

Forest Systems Forest Capital

-400

Plum Creek

-200

Hancock

0

Conservation

1,000 acres

200

Conservation organizations have been involved in major timberland transactions Year

Seller

Buyer

Hectares

Value US$ million

1998 1999 1999 2001 2001 2002 2002 2002 2002 2002 2002 2003

Champion Kimberly-Clark IP St. Joe Co IP IP IP IP Great Northern IP Hancock Glatfelter

Conservation Fund Conservation Nature Conservancy Conservation Nature Conservancy State/Nature Conservancy/GMO Nature Conservancy Trust for Public Land The Nature Conservancy Conservation Fund The Nature Conservancy Forestland/Conservation

135,628 20,931 74,899 26,316 10,729 30,364 15,425 69,433 97,166 2,510 17,814 10,121

76 25 35 170 11 21 24 33 50 12 9 38

Total

511,336

503

Note: In some transactions conservation groups only hold partial ownership and/or conservation easement

Conservation Easements 

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A legal agreement between a landowner and a land trust or government agency that permanently limits some uses of the land to protect its “conservation values”. Easement may be sold or donated (for tax benefits) May apply to part or all of a specific property Easement transfers to new owners when the land is sold

Conservation groups had been concentrating on smaller forest parcels, with higher unit prices Selected Timberland Transactions in the US, The Nature Conservancy and Forest Industry Dollars/acre by parcel size: all regions $3,500 $3,000 $2,500 $2,000

Industry TNC

$1,500 $1,000 $500 $0 10

100

1,000

10,000

100,000

1,000,000

Interest by conservation groups in timberland is changing their relationship w/ the Forest Industry 

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Conservation easements can be applied to active, large-scale industrial forests: for example, Potlatch Corporation in Idaho. Some (moderate) conservation groups such as The Nature Conservancy and the Conservation Fund are pushing the concept of “working forests”, where the sustainable production of timber is a valid management strategy that fits the goals and objectives of the organizations.

The Cumberland Forest Project is a good example of the new type of “partnership”  

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IP sells 30,000 hectares of hardwood forest Timber rights acquired by Renewable Resources (a TIMO), with SFI-compatible forest management plan Surface rights, including restrictions on conversion of hardwood forest, acquired by The Conservation Fund State of Tennessee responsible for over-seeing, and eventually will receive ownership Financing by State (31%), Federal Government (26%), Doris Duke Charitable Foundation (20%), and various conservation organizations

Advantages of Conservation Investments 

Major new source of revenue:   

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From the conservation organizations From charitable foundations From government programs

Lends credibility to timberland managers Supports concept that sustainable use of forest resources is beneficial to society Can add value to timberland properties

Summary 

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The sale of large blocks of timberland by publicly-owned forest corporations is expected to continue. While many of these timberland sales will be to institutional investors through TIMOs, there will also be increasing sales of timberland from TIMO funds which have reached maturity. The participation of conservation organizations in major timberland transactions, often as partners with TIMOs, will likely increase Declining returns from timberland investments will push investors to find ways to take advantage of other forest values, such as conservation values, carbon rights, etc. Declining returns from timberland investments in the US have also given an incentive for greater interest in global timber investments, which are expected to increase in the future.