The Changing Landscape of Private Timberland Ownership

1
The Changing Landscape ofPrivate Timberland
Ownership

• Mike Clutter
• Hargreaves Professor
• Forest Finance
• Center for Forest Business
• The University of Georgia

2
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
  TIMOs 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.

3
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)

4
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
5
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
  activities?
• Will closed end fixed length funds change the
  investment in silviculture?

6
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?

7
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

8
Study group includes 35 interviews from three
industry sectors.

• Timberland Investment Management Organizations
  (TIMOs)
• e.g. FIA, RMK, and Hancock
• Forest industry firms
• e.g. Weyerhaeuser, Plum Creek, and GP
• Forestry consultants
• e.g. FW and Larson McGowan

9
Preliminary findings highlight the roles of
taxes, debt levels, and shareholder returns.

• For most C-corps, timberland ownership does not
  make sense.
• Double-taxation issues.
• Timberlands are easily sold relative to
  manufacturing assets.
• Proceeds can be used to reduce debt levels.
• 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.

10
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

11
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.

12
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).

13
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 300 per acre
• Many of these prices are above supportable
  Faustman land rents using a 0 tax rate and
  current stumpage prices, standard yields

14
Predictions

• In three years on one publicly traded vertically
  integrated forest product company will own more
  than one million acres of timberland
• TIMOs (actually their clients) will continue to
  gain substantial timberland ownership.

15
Specific to South Georgia

• Some changes in ownership
• Georgia-Pacific to Plum Creek
• Higher than average NIPF ownership in southwest
  Georgia
• Continued losses to other uses (HBU)
• Fragmentation not as accelerated as in other
  areas of Georgia
• Influence of Atlanta
• Coastal Influence

16
Questions ??