Thursday, May 3, 2007

Strategic Factors Driving Timberland Ownership Changes

This post references another paper examining the changes resulting from the shift in timberland ownership from vertically integrated industrial companies to TIMOs and TREITs. The paper was written by Mike Clutter (University of Georgia) and Brooks Mendell, David Newman, David Wear and John Greits (all with the USFS). The study was funded by the Forest Service. Following are a few extracts, kind of at random, that I found important or just interesting:

  • "more efficient tax structures for owning timberland have evolved - such as single-taxed real estate investment trusts (REITs) and S-corporations - replacing the traditional double-taxed C-corporations..."
  • "Client preferences and investment horizons impact the choice of silviculture treatments, leading TIMOs to tend to invest in silviculture early in the life of the investment funds, but not later."
  • On TIMOs: "We make money on growth."
  • On TIMOs: "Appraisals drive our business." Note that this comment and the one before it both get to the difference in accounting (GAPP) that allows such things as timber growth and appreciation in land prices to be treated as an annual return for the TIMOs but not for the C-corporations. Note too, that if a silvicultural activity, like mid-rotation release, doesn't increase the appraisal at least as much as it cost, it won't be done. Question - how good are the appraisers? Do appraisals reflect what is not seen?
  • "TIMOs, without exception, focused on the financial metrics of concern to their clients. ...this measure was some variation of cash return plus asset appreciation, as established through appraisals."
  • "These metrics reflected a general attitude toward silviculture treatments. ..., it’s ‘what will the market pay for this treatment if applied?’"
  • "TIMOs view silviculture information as a "commodity" and, in general, appear reluctant to invest in long-term research or forestry coops. ..." In other words, if the impact does not show up in the growth and yield models or appraisals, it does not pay to make the investment."
  • On community presence or public affairs: "TIMOs ... relied on their forestry contractors to establish and maintain sufficient working relationships within the communities." Some exceptions to this.
  • "...fragmentation was not viewed as a major concern or priority by any interviewee."
  • On fire control: "TIMOs and forestry consultants rely almost entirely on state resources. ...To assess the southern States fire suppression assets available for use we talked with all of the Fire Fighting Coordinators for each state... As expected, ... Most southern states have experienced significant reductions in private fire suppression capability during the past 15 years, the time frame during which industry ownership has been declining.
  • "The thirteen responding states report reductions in the availability of 700 private cooperator-owned and available tractor/plow units. Of the thirteen states, only Kentucky has not reported a reduction; others ranged from 12 to 142 (Georgia). Notably, Kentucky has the smallest share of forest industry ownership in the South. Limited reductions in air tanker availability (4), 20 person hand crews (1), and helicopters (1) were also reported."
  • "shareholders, analysts, and executives of the traditional vertically integrated forest products firms believe that returns on industry-owned timberlands lagged alternative investments, a fact complicated by the lack of recognition of asset appreciation and growth on forest products firms’ income statement."
  • "In the preponderance of transactions ownership changes did not lead to substantial land use changes."
  • "we expect these timberland ownership trends to continue. Within the next three years we expect that there will exist only one traditional forest products company that owns more than a million acres in the southern United States."
  • "The other trend that will continue to impact timberland ownership is the continued growth of rural real estate markets at the urban / rural fringe. Continued emphasis will be placed on identifying those acres and monetizing the assets as they become more valuable for other uses."
Read the entire report: Strategic Factors Driving Timberland Ownership Changes in the U.S. South. See the quick version in The PowerPoint Presentation

There are no surprises in this research but it has helped to document those things that we have seen. --Brian

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