The%20Changing%20Landscape%20of%20Private%20Timberland%20Ownership

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The Changing Landscape ofPrivate Timberland
Ownership

• Mike Clutter - UGA
• David Newman UGA
• Brooks Mendell UGA
• David Wear and John Greis USDA-FS

2
Background

• Following the Southern Forest Resource
  Assessment, a perception that things had changed
  with respect to timberland
• Southern Group of State Foresters arranged
  through Dave Wear and John Greis to fund this
  study
• Brought together an advisory group of interested
  parties including Forest Industry, TIMOs,
  environmental groups and others to lay out the
  scope of the question

3
Commercial Timberland Transactions

• Over 22 million acres of industrial timberland
  has changed ownership in the past five years (in
  large transactions)
• The traditional vertically integrated forest
  products companies have been the sellers and
  institutional investors have been the purchasers
• Trends are evident by region (NE, South, Lake
  States, PNW)
• Trends appear to be continuing with additional
  asset sales by integrated forest products
  companies. If any are left ??

4
Acres of Timberland Sales by State and Survey
Unit (1996 through 2004)
State Total FIA Unit FIA Unit FIA Unit FIA Unit FIA Unit FIA Unit
State Total 1 2 3 4 5 6
Alabama 2,583,175 13,344 443,811 621,445 775,375 607,000 122,200
Arkansas 1,633,695 146,879 12,700 1,314,096 124,020 36,000 -
Florida 1,935,270 1,378,930 542,340 14,000 - - -
Georgia 2,326,875 952,357 337,985 806,316 205,817 24,400 -
Louisiana 3,634,969 894,023 307,441 875,257 113,732 1,444,516 -
Mississippi 1,782,410 1,785 387,137 588,120 350,070 455,298 -
North Carolina 341,483 133,243 13,746 135,879 58,615 - -
Oklahoma 355,594 321,594 34,000 - - - -
South Carolina 1,074,512 241,780 190,131 642,601 - - -
Tennesse 1,067,954 40,200 90,500 343,000 447,500 146,754 -
Texas 778,251 328,210 450,041 - - - -
Virginia 924,852 459,172 241,680 70,000 126,000 28,000 -
Total 18,439,040            
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Timberland Sales by State and Survey Unit (1996
through 2004)
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Why ?

• Performance issues in the forest products
  industry
• Abysmal shareholder returns. Private placement
  returns on timberlands have been far better
• Consolidation among companies in the industry has
  left substantial debt on their balance sheets
• Recognition that timberland ownership may not be
  required to be in the forest products
  manufacturing business (a change in strategic
  thinking)
• Deep and mature markets for most raw materials in
  most regions of the country
• More efficient tax structures for owning
  timberland have evolved (not C-corporations)

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Strategic Context...

SP500 Return for same period 18
Total Shareholder Return January 1998 - June
30, 2001
8
5
-5
-7
-8
-10
-10
-11
-12
-12
-15
-13
-18
-23
-25
CHA
GPTGP
WY
PCH
W
MEA
WLL
BCC
TIN
IP
LPX
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Strategic Context (Total Shareholder Return
1/1/98 6/30/01)
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Strategic Context 2 (Total Shareholder Return
2/1/01 2/1/06)
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Forest Product industry performance relative to
key benchmarks
2004 returns Five-year return Ten-year return
Dow Jones Industrial 5.3 0.7 13.1
SP 500 10.9 -2.3 12.1
Forestry Paper Group 5.1 -0.9 6.2
Source Wall Street Journal, 2/28/05
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Strategic Context
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Leading Owners of Timberland in the U.S. (as of
12/10/2005)
Company Type 000 acres
1 Plum Creek T-REIT 8,406
2 International Paper FP-Company 6,800
3 Weyerhaeuser FP-Company 6,800
4 Hancock (HTRG) TIMO 3,315
5 Wagner Forest Mgmt. TIMO 2,500
6 Forestland Group TIMO 2,123
7 Forest Capital Partners TMO 2,100
8 Temple-Inland FP-Company 2,061
9 Rayonier T-REIT 2,036
10 Sierra Pacific Family 1,700
11 Potlatch FP, T-REIT 2006 1,525
12 Bowater FP-Company 1,525
13 Global Forest Partners TIMO 1,400

• Of the top 19 land owners, only 6 are forest
  products companies, 9 are TIMOs, 3 are REITs.
• Remember TIMOs do not own land they manage it
  for other investors

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Impacts on Timberland

• There are substantial concerns about the impact
  of these timberlands changing ownership
  including
• Will this trend increase / accelerate
  fragmentation across forested landscapes?
• Will management objectives and silvicultural
  practices change dramatically?
• How will the changes impact fire suppression /
  management activities?
• Will closed end fixed length funds change the
  investment in silviculture?

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Methodology

• Interview-based methodology utilizing a common
  set of questions with a broad range of timberland
  investors, firms and consultants.
• Objective
• Determine how these entities manage timberlands
  and how they perceive others are managing
  timberlands.
• Question is How are pine types managed by
  various entities?

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Types of questions related to timberland ownership

• Strategy and objectives
• For owning for selling
• Approach of managing while owning
• Operational philosophy intensity
• Community presence
• Metrics used to measure performance
• Expenditures
• Research, soil mapping, fire suppression
• Transaction-specific questions
• Perspectives on, for example, fragmentation

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Study group includes 39 interviews from three
industry sectors.

• Timberland Investment Management Organizations
  (TIMOs)
• e.g. FIA, RMK, Hancock
• Forest industry firms
• e.g. Weyerhaeuser, GP, IP, Temple-Inland
• e.g. Plum Creek, Rayonier
• Forestry consultants
• e.g. FW, Larson McGowan, American Forest
  Management

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Findings highlight the roles of taxes, debt
levels, and shareholder returns.

• For most C-corps, timberland ownership does not
  make sense.
• Double-taxation issues.
• In many cases timberlands were suboptimized to
  support mills
• Timberlands are easily sold relative to
  manufacturing assets.
• Proceeds can be used to reduce debt levels.
• Return proceeds to shareholders
• Shareholders, analysts, and executives of public
  firms believed returns on industry-owned
  timberlands lagged alternative investments.
• Selling timberlands freed up capital and
  generated shareholder value.

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Strategy for Owning Timberland

• The reasons for owning timberland varied widely
• Integrated forest products companies raw
  materials support for mills, insurance, etc.
• Consultants Depends on the client
• TIMOs Focused on return on investment
• Institutional investors, as represented by the
  TIMOs were the most consistently focused on
  returns

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Strategy for Owning Timberland

• Maximize financial measures
• NPV, ROI
• Forest management differs by ownership
• Integrated firms more intensive over long-run
• TIMOs take both intensive and passive approaches
  depending on timeframe
• Overall view that a key to success is cost
  minimization

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Criteria and Metrics

• Forest management success and decisions measured
  against financial metrics
• NPV, ROI, risk adjusted returns
• Measures applied differently by firms and TIMOs
• Timber vs. property returns
• TIMOs use broader range of metrics, depending on
  client objectives
• Capital preservation, mean-variance metrics
• Consultants focused on achieving client
  objectives
• Performance measured against annual budget

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Silviculture and Forest Management

• A variety of perspectives from the vertically
  integrated forest products companies, TIMOs, and
  large private landowners
• Silviculture practices probably are impacted
• More harvest flexibility for TIMOs maybe
• Less long term silviculture investment maybe
• Little investment in activities like soil
  mapping, etc.
• Fund length appears have an impact on investment
  decisions

22
Research Expenditures

• Widely differing views on the role of applied
  research and the funding of technology
  development
• Forest products companies see traditional
  forestry research dwindling as they move away
  from timberland ownership
• TIMOs have a poor record of supporting such
  activities
• Substantial questions about the future of
  traditional forestry research
• Broad consensus on desire for flexible pricing
  with and competition among cooperatives

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Fragmentation

• In several of our case studies, these divestures
  and acquisitions have accelerated fragmentation
  in a variety of ways
• Case studies
• Many have voiced concerns about this increased
  fragmentation and its impact on wildlife habitat,
  recreation opportunities, future growth rates and
  timber supply, etc.
• Viewed as a two-edged sword.
• All recognized the value creation from HBU sales
• Mentioned the environmental and resources
  management issues as well

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Use of Debt in AD activity

• Some of the deals have used debt extensively and
  have a higher probability of greatly increased
  harvest and minimal silviculture investment.
  These deals can be identified.
• Generally purchased by entities that do not have
  a long-term interest in timber and timberland
  investment

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Fire Suppression Activities

• One question we did pursue was the impact these
  trends have had on fire suppression and fire
  management activities.
• Data collected from the southern States document
  substantial losses in resources dedicated to
  these activities.
• In many states the resources have dropped by over
  50
• The new ownership groups have not provided the
  same level of resources as the traditional forest
  products companies (nor do the remaining forest
  products companies at this point)

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Capital Gains Taxes

• All of the large transactions have involved some
  strategy to mitigate or eliminate the large
  capital gains taxes due from the sellers of the
  timberland
• Installment notes
• Reverse Morris Trust Transactions

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Case Studies

• In three specific areas (GA, TN, LA), case
  studies of specific large transactions are being
  assembled to understand the impacts of ownership
  changes in a more local context and the issues
  that have surfaced.
• These case studies provide the opportunity to
  assess (1) amount of timberland that has changed
  ownership, (2) the reasons for the change, and
  (3) the impact on the timberland and the local
  market and economy.

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Case Study - Weyerhaeuser Sale of its GA
timberlands (as of May 2005)
Weyerhaeuser 270,000 acres
VFI 197,000 acres
Georgia Fall Line 40,800 acres
Oaky Woods 19,500 acres
Copper Station 12,700 acres
RMS 66,000
St. Regis 66,000
Southern Pine 66,000
AmSouth clients 24,000
Sold or selling 30,000
Sold or selling 50,000
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Timberland Ownership Data

• We have assembled a database of large timberland
  transactions over the past 5 years to help
  identify those areas of significant activity.
• Over 600 transactions from 1996 to the present
• Majority of the transactions are focused in the
  South
• Documents that over 80 of the transactions
  increase tax efficiency (less taxes paid).

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Timber and Timberland Prices

• Clearly prices being paid on large transactions
  are at all time highs.
• 800 to 1500 per acre is not uncommon for land
  and timber in the south. Trends apparent from
  east to west.
• 1500 to 2200 per acre in the PNW.
• Maine is at 200 to 400 per acre
• Many of these prices are above supportable
  Faustmann land rents using a 0 tax rate and
  current stumpage prices, standard yields

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Predictions

• TIMOs (actually their clients) will continue to
  gain substantial timberland ownership.
• Timberland will continue to be an attractive
  asset class for institutional investors
• In three years no publicly traded vertically
  integrated forest product company will own more
  than one million acres of timberland

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Questions ??