Thursday, March 22, 2007

Timberland for Retirement

Things have been a little slow on the transaction front lately but a couple of articles caught my attention with respect to investing retirement funds in timberland. The first is another example of Europeans moving more aggressively with pension fund investments (which is not really news) and the second relates to an individual buying timberland in his/her self-directed IRA. The latter one was certainly news to me and I found the methodology very interesting.

In the case of the Europeans, a Dutch company, Stichting Pensioenfonds ABP, (reportedly the third largest pension fund in the world), had a contest among employees to select some innovative investments to supplement the standard stocks and fixed income investments. APB is committing $5 billion to this particular investment. They had several ideas (art, wine, etc.) but the winner at this point is timber and ABP plans to make an investment by the end of the year. The article makes reference to the NCREIF Timberland Property Index which shows the value of timber assets increasing at an annual rate of 15 percent over the last 20 years compared to a 12 percent annual return for the Standard & Poor's 500 Index. Those kind of numbers certainly do draw investment interest.

The article also states "California Public Employees' Retirement System, the largest public U.S. pension fund, said in January it planned to start a new asset class that would include some timber investments". That's an interesting development when just two years (three years?) ago the concern was that timberland prices would fall because CALPERS was selling its timberland investments and getting out of that market! If interested, you can read the whole article here.

Here is a final quote from the article above which I will use as a springboard into the self-directed IRA discussion.

"While a fund the size of ABP can explore esoteric investments, most company pension funds wouldn't be able to, said John Hastings, a consultant at Hymans Robertson in Glasgow.
'If you are going to do something like this you have got to understand it and smaller pension funds wouldn't have the resources to do that,' Hastings said."

So if you think timberland is an "esoteric" investment, if you don't know what a TIMO is and if you have never heard of consulting foresters, read no further. But if you would like to consider timberland as a part of your (or a client's) IRA, read on.

The key to a timberland investment in an IRA is to create a Limited Liability Corporation and then to transfer the assets of the IRA into the LLC. The IRA actually owns the LLC which can then purchase and own timberland or other "alternative" investments (or "esoteric" if you prefer). For a more lengthy and much clearer explanation, see "The IRA Owned LLC, A Great Tool for Investing".

I have a self-directed IRA, mainly invested in stock, which I can assure you has not produced anywhere near the return of my Tree Farm so this does sound very interesting. The one issue that merits a little more thought is the taxation issue. A timberland investment outside the IRA would not be taxed until it was sold (at retirement let's say) and then it would be taxed at the capital gains rate. I believe the same investment for timberland in an IRA would be taxed at the normal rate as it was withdrawn from the IRA. Somebody check me on this.

Finally, it looks like there may be an opportunity for a consultant forester or two to link up with the lady that wrote the article to provide a package for IRA investors interested in adding timberland to their IRA portfolio. That would take the "esoteric" out of it!

Friday, March 9, 2007

Menasha to be Bought by the Campbell Group

"Menasha Forest Products Corporation("MFPC") announced today that it has entered into a definitive merger agreement through which an affiliate of investment funds managed by The Campbell Group would acquire MFPC. Under the terms of the merger agreement, holders of MFPC's outstanding common and preferred stock will receive an undisclosed sum in cash. The transaction includes the assumption of MFPC's debt and other obligations."
"Through this transaction, The Campbell Group will acquire approximately 135,500 acres of prime timberlands in Oregon and Washington together with MFPC's related businesses. "On behalf of our clients, we are pleased to have the opportunity to acquire this portfolio of high-quality, productive timberlands," said John Gilleland, President of The Campbell Group." Click to read more.

Although my experience with Menasha is somewhat limited, I have met with them a couple of times. The thing that impressed me most was the quality of the people. The Campbell Group will be getting some very good people along with the 135,000 acres. --Brian

Wednesday, March 7, 2007

Small Unnoticed Changes

The purpose of this Blog is to examine all of the changes resulting from the shift in timberland ownership. Some changes, like the Temple-Inland land sale, catch a lot of attention. Others changes go pretty much unnoticed but are perhaps of even more significance.

Yesterday's mail carried the death notice of "Forest Focus", thought by many to be one of the best available forest management periodicals targeted at landowners, lawmakers and the general public. "Forest Focus", published by MeadWestvaco, one of the companies divesting itself of timberland, apparently can no longer economically justify the cost of publishing a magazine with a focus on forest management. If MWV owns no forest land, it certainly makes no sense for it to absorb the cost of carrying the forest management banner.

The forest industry had a very serious commitment to communications with the public surrounding forest management issues. The sad thing is that every company in the industry that has divested itself of its landholdings has also divested itself of publications seeking to educate the public about why foresters do the things they do. And this is a gap not being filled by the new timberland owners (at least that I am aware of - tell me if I am wrong). Forest management will be defined by those opposed to commercial forest management if no one picks up the banner! The cost of ignoring the issue will be higher costs and lower ROIs as the forest industry learned many years ago. Now it's the investment communities time to either learn that lesson or to pick up the banner.

I can't mark the end of "Forest Focus" without paying tribute to Casey Canonge. He created and nurtured it into a remarkably effective publication. Well done, Casey!

Cambium Raises Cash

The Scottish financial investment firms are teaming up with the Brits to put more money into the global timberland investment market.

"Cambium, which is incorporated in Jersey, will invest in a diversified portfolio of timberland assets. The placing raised £104m from Scottish institutions and from investment funds like British Steel Pension Fund, Altimus, Midas Capital and AXA-Framlington. Cambium intends to invest the cash raised in a global portfolio of forestry-based properties and in forests that can be managed on a sustainable basis, McGrady said. Cambium is the first purely timberland investment vehicle to be hedged into sterling and designed specifically for British investors. Read more.

It seems like every day more money pours into the timberland market. Are we in the early stages of a developing "timberland bubble"? The positive market factors (beyond historical returns of timberland) include the political momentum for carbon sequestration and energy independence. The down side is a lot of money chancing a fairly finite land base. Another positive point is that if institutional investors have really accepted timberland as a separate asset class, there is still a HUGE amount of money to flow in that direction. As we are seeing from the Brits. And yesterday's Bank of America announcement. Temple-Inland should do quite well.

Tuesday, March 6, 2007

A New Green TIMO?

Is Bank of America about to enter the timberland investment field with a focus on FSC certified forestland? Or am I reading this incorrectly?

"Timberland Investment Solutions: Bank of America is evaluating proprietary investment management solutions that incorporate forest conservation principles consistent with those defined by the Forest Stewardship Council. Reforestation, wildlife management, responsible development and the support of carbon sequestration ecosystems are important attributes that will be considered. Bank of America intends to commit its own capital to promote "green" investment solutions for its clients." Read the entire news release.

Monday, March 5, 2007

Who SHOULD own the forests?

One of the stated objectives of this Blog is to look at HOW the ownership of timberland (a term used specifically to describe commercial forestland) is shifting as industry disposes of it's landholdings. As the process continues, some timberland merely changes ownership (remaining timberland) and some shifts totally out of the commercial realm into a "protected" state where timber products are no longer produced. In most cases, though, the land does continue as timberland but perhaps with less emphasis on timber production. But who are the new owners? TIMOs, as we have discussed; "small" private landowners of family forests, as discussed earlier; NGOs, to be discussed at a future time; and, finally, the government (federal, state and local).

Should our governments own any forestland at all? Should we stop government from pulling land out of the private sector and adding more to the continuously increasing amount of public ownership? Should we sell all of the National Forests to the private sector? If you answered "Yes, yes, yes", then you are a pure capitalist! The flip side would be to continue buying by government - buy everything available through outright purchase or by exercising the governments right of eminent domain. Private land ownership should be eliminated because the government can do a better job of forest management than the private sector can. Is that a good idea? If you answered "yes", then you are a pure communist and you can point to Russia to show how forestland should be managed.

But, like most Americans, you probably feel that there is a happy medium somewhere in between. There is a role for both public and private ownership. The real question is "Where do we draw the line?", and as this shift occurs, it makes sense to have a debate on the scope of increasing government ownership. As a case study, let's look at Bowater's decision to get rid of its land in Tennessee. The first step was to donate 3,700 acres to the State of Tennessee to be added to the state park system (no longer timberland). Phase two was for the State of Tennessee to purchase 12,500 acres which will probably also be transferred from the role of timberland and into the wilderness/park designation. As for the remaining 124,000 acres of timberland, the State of Tennessee has a proposal to acquire that as well. For an overview of that proposal as well as a capitalistic view of government ownership of land, go to "How Much Land Should the Government Own" by conservative Henry Lamb. For a view of the Governor's perspective on this deal and for an insight into the interactions of TIMOs, NGOs, government and industry, click here.

There are clearly forces at play that will increase government ownership of forestland at the expense of commercial timberland as industry continues to dispose of its land. Good or bad? I guess it depends on whether you are a communist (socialist?) or a capitalist! Either way, it appears that there is public support for increased ownership of public land and debate on the scope of that would be a good thing.

From my perspective (and I'm the Blogger!), consolidation of public ownership (acquiring inholdings from willing sellers), acquiring easements for hunting/public access/recreation, and protecting truly unique areas are examples of where government ownership should be encouraged. But I have to oppose the insatiable appetite of those that feel government should acquire everything on the market. And there are clearly many in that camp. Where do you sit? Why?--Brian