Changing Timberland Ownership Trends in the USA

1
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

2
Discussion

• 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

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Forest Industrys share of private timberland in
the US peaked in the mid-1980s
Source US Forest Service
4
More than 8 million hectares of timberland have
changed hands in the US since 1987
2003 includes pending sales
Source Timberland Markets
5
Major Forest Products companies in the USA have
been selling their forests

• 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.

6
Most timberland transactions in the US have been
in the Southern Pine Region
Source Timberland Markets
7
Who are the institutional investors in timberland?

• Public Pension Funds, such as
• CalPERS (Cal. Public Employees Retirement System)
  
• State teacher Retirement System of Ohio
• Washington State Investment Board
• Private Pension Funds, such as
• General Motors
• Delta Airlines
• United Parcel Service
• Foundations and Endowments, such as
• Harvard University, Yale University, and Hughes
  Medical Inst

8
Timber investments in the US have reached 16
billion, with institutional investors holding
about 10 billion
Source Hancock Timber Resource Group
9
Institutional ownership has expanded to nearly
5.0 million hectares in the US
Source Hancock Timber Resource Group
10
Institutional investments in timberlands in the
US are managed by 12-15 TIMOs
Source Timberland Markets
Hancock currently selling 340,000 ha of forest
11
Only a few TIMOs have ventured outside North
America, with UBS the clear leader
12
A number of factors have been encouraging the
changes in timberland ownership

• 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

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Returns on timberland have been trending lower
Source NCREIF
14
Timberland Returns have been heavily influenced
by early gains in the PNW
Source NCREIF
15
Long-term returns on timber have been impressive,
but more recently
Source NCREIF
16
Of course, relative to timber investments in some
regions, the US looks impressive

• UK Conifer Stumpage Index, 1973 - 1999

Source DANA Ltd
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Outlook for timber investing?

• 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????

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Conservation groups were among the largest
purchasers of timberland in 2002
Source Timberland Markets
19
Conservation organizations have been involved in
major timberland transactions
Note In some transactions conservation groups
only hold partial ownership and/or conservation
easement
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Conservation Easements

• 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

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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
22
Interest by conservation groups in timberland is
changing their relationship w/ the Forest Industry

• 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.

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

• 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

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Advantages of Conservation Investments

• Major new source of revenue
• 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

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Summary

• 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.