Wednesday, February 28, 2007

Auditing Timberland Silvicultural Activities

This is a sensitive subject but it needs surfacing. It applies to all organisations that are subject to financial audits. Many, perhaps most, financial audits of timberlands operations are pretty much worthless and provide a false sense of security. An effective audit of their revenue/expenditures for activities such as timber sales, site preparation, tree planting and road construction must have four components to have any level of credibility. They are:

1. the convention financial audit
2. a report of activities showing the pertinent information by an I.D. number (sale, stand, activity, etc).
3. a map with corresponding I.D. numbers
4. A field audit that verifies that what is on the ground is consistent with what has been reported. (i.e. stand 1521 is actually 156 acres of loblolly pine and is stocked reasonably close to the reported level).

So..., if you have an investment in timberland, did your forest managers audit meet these requirements for both revenue and expenditures. From my experience, there are three requirements necessary to make this happen.

First, the senior manager team must include foresters so there is a solid understanding of what is happening on the ground. You would think that this would be a given but it is not true in all TIMOs.
Second, a management information system capable of reporting those activities (the report) and capable of saying exactly where the activity took place (the map). This requirement is generally met in the form of a Geographic Information System.
The final requirement is a management team willing to make it happen. This type of an audit can expose weaknesses in even the best of organisations. Properly executed, these audits will not only assure investors but will also form the basis of improved operations.

When I was with the Forest Technology Group (responsibilities included both development and sales of webFRIS at various times) I had the opportunity to see the information systems of many forestry companies, TIMOs and state forestry organizations. In the process, I also noted a huge difference placed on the value of solid information by different organisations. The organisations with the best systems wanted even better systems. Some organisations had virtually nothing and little interest in obtaining the type of system required for adequate timberland management. If there were no foresters in key roles, there was little priority placed on good information systems or field audits. And I am convinced that those in charge did not recognize their vulnerability. The long term nature of forestry investments has the capability of masking poor management control. But sometimes, the chickens do come home to roost.

There is an alternative to a willing management team - an investor that requires it. As President Reagan put it - "Trust but verify".

Tuesday, February 27, 2007

Forest Fragmentation and Logging

As many people have noted, one of the impacts of the changing timberland scene associated with the HBU sales is forest fragmentation. This is generally regarded as a bad thing but, as I have noted before, it has many positive benefits as well. Either way, it is a reality and certain issues need to be addressed if we expect to practise forestry on these smaller tracts of land.

At one point in my Westvaco career I was responsible for monitoring the global fiber supply. The supply/demand situation was fairly straight forward for most countries but Japan was a real paradox. Japan was purchasing chips from all over the world but hitting our Southern ports very hard. They were importing large amounts of logs from our West Coast and moving aggressively into the Chilean radiata market. On the surface it was obvious that Japan was clearly using more wood than it could possibly grow. But the growth/drain ratio, and herein lies the paradox, told a very different story. Japan was not only growing more wood that it was cutting but Japan was actually growing more wood than it was using! So what was happening?

Forest fragmentation was so severe that harvesting costs were so great that it became cheaper to buy and pay heavy transportation costs than to harvest locally. Will this happen to us?

To a degree, yes, it will happen to us. But we certainly don't have to follow in Japan's footsteps. These smaller tracts of land forming the "family forests" represent an opportunity for a logging model that leaves a "kinder, gentler" footprint on the landscape. Yes, logging costs will be higher and landowners will have to accept less for stumpage than a traditional, high capacity logger can afford to pay. But the Japan experience says that some of the higher production costs would be offset by lower transportation costs.

Question: What is the key to capturing the forest products from the smaller family forests? Answer: Wood Procurement management willing to supplement existing harvesting systems with producers capable of low-impact (and lower production rates) systems. Higher logging costs in return for lower transportation and stumpage costs. Given the current state of the domestic pulp and paper industry, its doubtful that we will see anything significant along these lines anytime soon. But wood demand will increase (nature abhors a vacuum) and this opportunity will present itself in the not to distant future.

Temple-Inland's Timberland for Sale

Temple-Inland has announced that it is splitting the company into three pieces and selling its "1.8 million acres of timberland in Texas, Louisiana, Alabama and Georgia." This should cause a little excitement among the TIMOs along with some late night and weekend work for a few folks!

Icahn's comments: "Temple-Inland's management and board of directors should be commended for listening to the concerns that we and other shareholders have expressed and for announcing plans to take the actions we suggested" Looks like he made his money without a takeover. The stock was up 13% on yesterdays news. Click here for a little more detail.

Wednesday, February 14, 2007

Hancock in New Zealand

The following is from yesterday's Manulife's earning announcement:

"The Hancock Timber Resource Group (HTRG) announced the acquisition of approximately 200,000 hectares (494,000 acres) of New Zealand timberland and forestry rights. The properties are plantation forests that bring the total under HTRG management in New Zealand to approximately 296,000 hectares (731,000 acres)."

Monday, February 12, 2007

TFG Acquiring Ohio Lands

In a cooperative deal with the Conservation Fund and the Ohio Dept. of Natural Resources, The Forestland Group, a TIMO that focuses on natural hardwood management, will pick up almost 16,000 acres of former MeadWestvaco timberland in Ohio. DNR will get conservation easements on most of it immediately. This deal reportedly brings the total acreage for TFG to 2.1 million acres located in 17 states. Read the detail here.

Friday, February 9, 2007

GMO, Tennessee and the Nature Conservancy Deal

GMO, a Boston based TIMO, is reportedly working on a deal that would add 124,000 acres of timberland to the State of Tennessee's land holdings. Tennessee estimates the value of the timberland at $148 million. The deal apparently includes both fee land as well as conservation easements. The Nature Conservancy and the Lyme Timber Company are both involved in the proposed transaction as well. Read about it in more detail.

Wednesday, February 7, 2007

MWV Selling, Molpus Buying

According to the Ledger-Enquirer in Columbus, MWV is getting out of the forest management business in GA and AL. It is actively seeking buyers for 227,000 acres there plus an additional 63,000 acres in WV. An MWV spokesperson is quoted as saying that 35 people in the Forestry Division will be "affected" by the sale. You can read the article here. This morning Goldman Sachs raised its rating on MWV from a "sell" to a "buy" based on its land sales strategies. In the recent MWV news releases, a great deal has been "unsaid" about the future of MWV's SC mill and timberlands although there is certainly no shortage of rumors. MWV is also reportedly looking for a buyer for it's nursery and seed orchards.

On the other side of the nationwide acreage flip, "The Molpus Woodlands Group, LLC, a timberland investment management organization, headquartered in Jackson, Mississippi, has completed the purchase of approximately 44,379 acres of timberland located in LeFlore and Pushmataha Counties in southeastern Oklahoma on behalf of an institutional investor. The transaction closed on January 25, 2007." Molpus now manages 557,000 acres in the South.
Read the entire news release.

Increasing Investor Interest in Timberland

If you have been watching the stock price of the timber REITs for the past few months, you should have noticed some pretty dramatic gains (way above all market indices!). Plum Creek went from about $34 into the low $40's. When they announced lower earnings and a less than optimistic outlook, the stock price barely hiccuped. Potlatch is up. Rayonier jumped. In fact, during the last 30 days when the S&P jumped about 1.5%, PCL, PCH, RYN, TIN, WY, & JOE are all up from 6% to 12%! What's happening?

Private investors are looking for the pure timberland play but it's hard to buy a tract of timberland (at least in a knowledgeable manner). And that timberland is not too liquid either but a share of one of the above companies is. And private investors with the big bucks have the same thing in mind. Example: Carl Icahn moving heavily into Temple-Inland.

On the institutional investor side, the demand for timberland just keeps building and getting more competitive as more institutional investors recognise timberland as an asset class in itself. What started with institutional investors here in the U.S. is now spreading world-wide at a pretty fast pace. Here is an interesting article that illustrates the increased interest by investors in Europe. All told, there is a lot of money chasing timberland with no outlook on the horizon suggesting that the demand will decline anytime soon.

Monday, February 5, 2007


This mornings news and 558,000 acres shifts hands. Longview is a REIT and Brookfield will apparently continue to manage it as such. Will they keep the mill and container plants?? --Brian

"Brookfield Asset Management (NYSE and TSX:BAM) (“Brookfield”) and Longview Fibre Company (NYSE: LFB) (“Longview”) today announced they have entered into a definitive agreement for Brookfield to acquire all the outstanding shares of Longview for cash at a price of US$24.75 per share, for a total transaction value of approximately US$2.15 billion including assumed debt... With this transaction, Brookfield will acquire 588,000 acres of prime, freehold timberlands in Washington and Oregon , the heart of the Pacific Northwest . The high value species, excellent growth rates and significant standing timber inventories make these timberlands among the most valuable in the world. In addition, Brookfield will acquire one of the largest pulp and paper complexes in North America at Longview , Washington , and a network of 15 corrugated container plants located in 12 states.
“Longview Fibre represents an excellent opportunity to acquire one of the largest and highest quality portfolios of freehold timberlands in the U.S. , furthering our strategy of investing in high quality assets that generate long term sustainable cash flows that increase in value over time,” commented Sam Pollock, Managing Partner. “We already manage 2 million acres of timberlands in North and South America, including 635,000 acres on the British Columbia west coast, proximate to Longview's timberlands in the Pacific Northwest. The acquisition of Longview 's timberlands will significantly expand our timberland asset management operations and solidify our position as the fourth largest owner/manager of timberlands in North America by value.”
Read more about it.

Saturday, February 3, 2007

The Most Important Change...

in timberland today is clearly the shift in ownership from forest industry to TIMO's, government and NGOs. I have heard many comments suggesting that the shift to TIMOs is a bad thing but, if we believe in capitalism and free markets, then we have to think otherwise. Good or bad, though, is like beauty - its in the eye of the beholder. One person would think that all of the IP lands that went to the Nature Conservancy was a great change. A mill owner needing hardwood sawlogs might not think it was so good!

But one thing is for sure, things will be different and that is not just in the eye of the beholder. Let's throw out for thought what some of those changes might be. First, what about productivity of the land from the perspective of forest products. There is a lot that goes into this ranging from silvicultural investments to the length of ownership. The forest industry's ownership horizon used to be to own timberland "forever". Not so for TIMOs which normally have a relatively short time horizon and factor in the value of "flipping" HBU (Higher and Better Use) lands at the time of acqusition. I once bought a tract of land in Mississippi at a very favorable price because the owner felt that if he sold to a paper company he would never have to worry about having neighbors close by because the land was sold for building lots. Those days are gone. TIMOs are clearly more likely to capitalize on the HBU lands than industry did historically. This pulls forest land out of productivity (not a bad thing, just a fact).

Recently while attending a Tree Farm meeting I was listening to comments about how the TIMO sales of HBU lands to homeowners and hunters was creating a serious forest fragmentation issue which I suppose is somewhat true. What wasn't said is that these sales are also creating a wonderful opportunity to bring many more people into the Tree Farm System and to add to the political strength of those owning Family Forests. So there are pros and cons surrounding fragmentation.

Productivity is greatly impacted by silvicultural investments, particularly in young stands. I'm not sure how TIMOs compare to forest industry on that issue. I know some TIMOs that practise very intensive forestry and some that do minimal work and just hope the value increases. There is a big difference between TIMOs. But guess what - there was/is a big difference between companies in the way industrial land was/is managed. I'm not sure what or if there is a net difference.

In the area of basic research and developing and implementing technology, the TIMOs clearly fall down. The historically long term view of industrial firms is absent with the shorter time horizons of TIMOs and basic research is gone. TIMOs seem to be very good at implementing proven technology if, and only if, the gain will show up in the next annual appraisal. Forest research must come from academia and government in the future, right? Maybe not. Capital markets will come to the rescue and provide the technology needed (you do have faith in capitalism!). As industry disposes of its nurseries and research wings, a new industry will emerge to provide those products and services (we are already seeing it develop) and my guess is that the new industry will deploy its capital more efficiently that has been done in the past.

Now let's think about fire control. As industry has sold land it has also disposed of, or significantly scaled back on the fire fighting assistance that it has provided to state fire control organizations. When the largest timberland owner in the U.S. sold its lands to TIMOs and NGOs, the seller no longer needed fire control equipment and its pretty safe to say that the new owners had little interest in maintaining fire control personnel or equipment (somebody tell me if I'm wrong!). Now, what about our faith in capitalism and the thought that capital will flow to meet this need. Perhaps the faith is misplaced here and these new buyers (TIMOs, NGOs, Tree Farmers, homeowners, hunters. etc) need to step up to the plate and provide very strong support for funding of state forest fire control organizations. That means through both lobbying and increased taxes on forestland focused 100% on improved fire control. This will not happen until after a major calamity. In the meantime, state fire control budgets will shrink (in real dollars) as government finds "better" places to allocate its expenditures.

So..., what's the net change in productivity as a result of all these changes? My guess, and that is all that it is, is that productivity goes down mainly as the result of a decline in productive acreage. That's bad. Or is it. Pulpwood demand has dropped significantly in the U.S. so maybe the productivity decline will be a good thing. Or maybe we will come to understand that people would rather eat than have gasoline made from corn ethanol. Or see timberland and wildlife habitat cleared for corn fields. Perhaps soon a President will wake up to the fact that he/she has a nation with forests capable of providing ethanol (and other forms of fuel) and a very capable research team already in place that is capable of making it happen. Then forest productivity will once again be a major issue and timberland investors will be smiling. And capital will flow to forest research! and to silvicultural expenditures! and to fire control! But that's a thought for another day. --Brian

About This Blog

The timberland picture in the U. S. has changed dramatically during the past decade and clearly will continue to do so. The objective of this site is to monitor those changes and to think through their implications. Are the changes good or bad and who gets to determine what good is? As timberland shifts from industrial ownership to TIMOs, what are the implications? As TIMOs dispose of land, what are the implications? That's what I want to think about and to provide something of a forum for other's thoughts. What do these changes mean to investors, hunters, the forest industry, environmentalists, tree farmers, foresters and ordinary citizens who could care less but are none the less impacted. 2/3/07 --J. Brian Fiacco