Friday, January 16, 2009

How Much Did Timberland Values Fall in 2008?

My stock portfolio has certainly taken a hit to the downside. The housing market has tanked and the values of many houses and rental units have gone down with it. Stocks of the publicly traded timberland owners have gone down 20 to 60% in the last year or so. The logic is that the decline in housing has caused a drop in lumber price which has created a drop in timber (stumpage) price which has resulted in a corresponding drop in timberland prices. So logically my portfolio has taken a hit on the tree farm side too. But has it?

I do some consulting with market analysts and hedge fund managers interested in valuing timberland and the drivers behind it. The most common question that I have heard recently surrounds the declining value of timberland and just how great that decline is. How can a company like Weyerhaeuser or Plum Creek be properly valued given the logical decline in timberland values? I could give my opinion (and I always do!) but that is not enough.

I have been maintaining a database of the major timberland transactions for over a decade so I wanted to quantify the change for 2008. Below is a chart showing the $/acre sale price trend for the last decade.


















This is pretty interesting. Nationwide, it appears that prices have dropped about 21% following a year where they gained 60%! BUT… it is important to understand the data and what is happening. This database is composed of transactions that total between one and seven million acres in any given year. Also in the database is a “REGIONS” field. Price distortion occurs between years due to the variation in the percentage of sales occurring between regions ($/acre varies significantly between regions). So how does the price per acre change if we just look at a single region? Let’s look at the South.



















Within any particular region, individual transactions will impact any given years weighted average price. In spite of that, the trend is clear and it is difficult to find any argument in the data that supports a decline in timberland pricing – at least in the South. The first reported sale for 2009, Potlatch to RMK, was at $1,745/acre, right in the ballpark.

The Northeast is the only region that did show a drop last year. The acreage sold in the NE was not particularly large (meaning most of the variability was probably due to the variability between tracts) so I would be reluctant to attribute much significance to the decline. There was one significant datapoint though. The Essex Timber to Plum Creek transaction (at $267/acre) pulled the average down. It is important to note that there was a conservation easement on this tract. We should expect to see significantly lower transaction values as more sales occur on tracts with existing conservation easements. The sale of a conservation easement provides revenue in the form of an early payment for HBU land but it can also have a negative impact on future forestry based revenues as well.

So…, what does all of this mean? I can see little or no decline in timberland values. I’ll be curious to see what the NCREIF index on timberland values has to say. The index is based more on appraisals than actual sales but the appraisals SHOULD be based on comparable sales and comparable sales just do not support a decline in appraisal values. If sale prices are not declining, what is wrong with the logic expressed in the first paragraph – declining housing starts means declining timberland values?

Here is my take. First, buyers are “looking through” current timber prices. Sophisticated timberland investors use appraisal techniques that look at cash flow from timber over the planned life of the investment. Those timber values are based on their view of the future, not just today’s market.

Second, more money is chasing fewer acres. A significant amount of timberland is being pulled from the market. Example: almost all of the 161,000 acres of Finch and Pruyn timberland in the Adirondacks will ultimately be withdrawn from production and become a part of the Forest Preserve. An example from the other side of the equation: this week the United Nations announced that its pension fund would diversify its portfolio and seek to acquire timberland. More money chasing fewer acres. Institutions want to diversify their portfolios, particularly by acquiring hard assets.

Third, future wood demand will be impacted by both renewable energy and global warming concerns. We are already seeing pellet mills being built to export pellets to Europe where they are mixed with coal to reduce the amount of carbon tax the utilities must pay. Most forecasters expect to see a similar tax in the U.S. soon.

Fourth, there is evidence that declining interest rates are impacting the discount rates used by institutional timberland purchasers. A declining discount rate drives value up!

These are my thoughts, these are my numbers, and these are my opinions. Comments are welcomed. --Brian

13 comments:

  1. Would you say that if someone were to buy the entire stock of a large public timber-owning company, at current stock prices, it would be a good deal?

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  2. You would clearly have to look at the company's debt level first but, in most cases, the answer is an unqualified "Yes". That is why Plum Creek sold 400,000 plus acres of timberland and bought back it's own stock.The market value of its timberland was not reflected in the value of its stock. So..., Plum Creek's management has also answered your question with a "Yes". --Brian

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  3. Great piece, Brian. Had lunch with a director of a TIMO this week and I think he would reflect your sentiments. I'm directing my editor to this entry. I am sure he will enjoy it as I did.

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  4. Brian...great post. Your analysis validates the challenges we have run up against in the market.

    Thank you,
    http://www.linkedin.com/in/jaybraunscheidel

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  5. I very much appreciate your blog. I'd suggest that given prices have not been based on timber revenues but bid up by real estate development (speculative in some places and very real in others), shouldn't we expect a correction in prices as HBU opportunities evaporate? Is the slowing of transaction frequency an early signal of future price declines? Also, interested in what you think of the NCREIF @ 2.74 - Abby

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  6. Abby,
    First, I have to disagree with your suggestion that timberland prices have not been based on timber revenues but on real estate/HBU opportunities. I believe that timberland prices are based on future timber prices and that the market valuation is based on the trend price. My last post, Valuing Timberland III, addresses this issue in some detail. The trend price, rather than current price, is critical to a long term DCF analysis. HBU opportunities didn’t evaporate but value did decline or would be scheduled later in the analysis. This would have some impact on valuation but it would be pretty minor in most timberland transactions.

    With respect to slowing transaction frequency being a harbinger of future prices, “I don’t know”!

    With respect to my thoughts on “the NCREIF @2.74”, I don’t see anything surprising about it. Quarterly numbers should not be given much credence due to the way they are reported. The first three quarters are estimates and Q4 adjusts things based on appraisals. A reasonable number can be obtained for 2008 by compounding the four quarters into an annual number which yields 9.5% or about one-half of the 2007 results. --Brian

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  7. Brian

    What is the source of your timberland transaction data?

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  8. The overall data source is a transaction database that I have been maintaining for many years. The individual transactions come from many different sources (some is better than others). For transactions involving public companies, I use SEC reports and quarterly earnings conference calls. --Brian

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  9. Reality is very different from what you claim in your blog. We are timberland investors from Pennsylvania -- the heart of the best hardwoods in the world. We have seen timberland values drop up to 50% as the price of sawtimber plummets. Last week we bought a tract for less than 1/3 of asking price.

    Come into the real word sir. All property values, including timberland, drop in a depression.

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  10. Mr. Pennsylvania,
    I have every confidence that there are reasons for distressed sales, especially in times of recession. That being said, I am envious that you can acquire quality timberlands at a fraction of the asking price. Granted, hardwood valuation has been a challenge for some but I am going to guess that you are describing small sale opportunities (less than 100,000 acres). If these sales are larger than that, you need to post your contact details and consider what type of transaction fee you and your organization would be willing to consider. Perhaps these properties were leveraged at levels and terms more commonly associated with retail holdings; or private estate liquidations? Maybe you can elaborate.

    By in large, timberland pricing in major markets (US South and PNW) heading into the end of the 2009Q1 appear to be quite sticky, although few sales have made it to market. Valuators are faced with a dilemna as to how to reconcile the early and strong Q1 and Q2 2008 transactional evidence with the Q4 public market performance. That being said, timberland sales for hardwoods in Pennsylvania are a minute facet of what Brian is referencing in the overall market. In fact, I would submit that this is a matter of scale - Brian's perspective is closer to the current and real view on timberland from a large and (hopefully) diverse timber portfolio holder (fund manager/ TIMO/ institutional investor with seperate account), and your comments pertain to your state's regional economic circumstances (granted, they are beautiful forests).

    Brian - thank you for taking the time to write this blog. And I also apprciate your readers' comments. Good luck.

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  11. How would you value timberland held by Weyerhauser?

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  12. I also invested in stocks but by God grace I haven't received that much lost.Although some of my friends had lost.this post helps you understand the facts and figures of Timberland.Stocks really need to be considered closely.

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