Timberland Transaction Update

Major timberland transactions have slowed considerably but some continue to close. I wrote an article for Forest Landowners Magazine (THE TREND IN TIMBERLAND PRICES) that was supposed to be published in October but the publishing date was postponed until late November so I thought I would do a little update on transactions to date for this year. From the list below, you can see that there are quite a few transactions but relatively few large ones.

Here is an insightful comment from Plum Creek's 3rd Quarter Earnings Conference Call.  "We have not noted any significant changes to our rural land markets since the last quarter's call. In general, rural land values were off approximately 25% in higher value regions such as Florida, portions of Georgia, and Montana. Rural land sales in lower priced markets such as Mississippi and Northern Wisconsin remain fairly active. Prices in these markets have been more resilient and appear to be off 15% or less from their peaks." The comment is supported by the Rayonier sale above for $1,200 per acre which is a conglomerate of sales showing that Florida is definitely a soft area. Some of the other companies are reporting very little decline in the rural/recreational market.

In spite of these stated declines, there remains little sale activity supporting significant declines in institutional timberland values. Several of the larger timberland sales were at a solid price but there are too few to say prices have not declined. Perhaps the most interesting thing about this list is the names of the sellers. They are almost ALL public companies selling land to try to protect their dividends (or in Forestar's case, the entire company!). The one TIMO sale was at a very good price.

If I have missed any sales, and I probably have, send me an email to jbfiacco@gmail.com. As always, comments and differing opinions are appreciated (especially if supported by facts).

My last post had an error in a link. Click here if you would like to see the PDF of the presentation The Forest Industry of the Future: What will it look like. . --Brian

I-P to Sell 143,000 acres

The following is from IP’s website
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International Paper (NYSE: IP) announced today that it plans to divest approximately 143,000 acres of properties located in the southeastern United States in a transaction with American Timberlands Fund I, LP (the "Partnership").

The transaction value is approximately $275 million. International Paper will sell approximately 114,000 acres to the Partnership for $220 million in cash and will contribute 29,000 acres, with a value of $55 million, in exchange for a 20 percent interest in the Partnership.

The transaction value is subject to various adjustments at closing and is contingent upon the Partnership raising $220 million to finance the transaction. The transaction is expected to close in mid-June.
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A couple of observations:
1. American Timberlands Company, out of Columbia, SC, also bought 20,000 acres from I-P last year. The Registered Agent for them is Mark W. Buyck III from Florence SC. Other than that, I don't know anything about them but it looks like they could use some money.

2. It also looks like somebody thinks the value of timberland has not dropped. The reported value is $1,923/acre. --Brian

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Visit my web site at Timberland Strategies
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Two Ongoing Changes in Timberland

Probably the most significant change happening today in the nation's timberland is the rapidly evolving biomass for fuel market. While most of the manufacturing residue has been used - primarily by the pulp and paper industry - for several years, the accelerating change in demand is beginning to show up in the stumpage market.

One of the other changes, perhaps more temporary in nature, is the increase in foreign ownership of U. S. timberland. Reasons include both the weaker dollar, although the fall appears to have reversed, and the European desire for a carbon neutral source of energy.

There is a very good news article in the Atlanta Business Chronicle which looks at the status of these changes in Georgia. You can read it here. The article references a USDA report on foreign ownership of timberland and farms. If you would like to read it, you can download the report here.

On a totally unrelated note, American Timberland Co. has acquired 20,000 acres from International Paper in Horry County, South Carolina. --Brian

Timberland – Keep it or sell it?

I like to look forward and speculate about what is going to happen. Sometimes with a good analysis, sometimes with just a good guess. Either way, nobody can say that you’re right or wrong. Only time can do that. And it does.

But once in awhile it is good to look back. Maybe to say “I told you so” or perhaps to see just how foolish I have been with some of my prognostications. Either way, the value is in the looking.

About ten years or so ago the TIMO sector was starting to grow in earnest. It was clear (to some at least) that C Corp ownership of timberland was probably not the best ownership structure. The large timberland owners were all Integrated Forest Products Companies (IFPCs) and some had already been experimenting with different corporate structures such as LPs and REITs. Most were maintaining the status quo and capitalizing on TIMO investor driven demand by selling off their “non-strategic” holdings to generate cash or reportable earnings.

By 2000, the pulp and paper industry was about five years into some very bad times from a profitability standpoint. The investment community (and I know many of my readers are market analysts - so pay attention to this little trip back in time), had one mantra. “Sell your timberland and pay down debt”. The decade before that it was all about percent self-sufficiency. The higher the level of self-sufficiency (the more land owned), the more favorable the analysts view of the company. Mantras change abruptly.

Interesting discussions occurred in many offices during the two or three years before and after 2000. (“Let’s keep the land and sell the mills!” – Heresy!). Reactions to the analysts’ demands (or maybe to the poor profits) were varied. In some cases, corporate management bought into the analysts view, other managers explored and ultimately implemented the evolving REIT structure and one major company maintained the status quo. So who was right? Perhaps this chart will shed a little light on the issue.

Picking Weyerhaeuser as the major representative (about the only one actually) of the “status quo” decision makers, I’ve compared their stock prices to the REIT crowd (PCH, PCL and RYN) and the timberland divestures crowd (represented by IP, MWV and LPX) over the past five years. What does this tell us?

The status quo decision was right in the middle with respect to stock price performance.

An examination of the three timberland sellers (those that restructured based on the advice and pressure of the analysts) were all losers – some big time losers. Analysts pay attention. Your advice and pressure destroyed a great deal of shareholder value. But then again, it wasn’t your fault. The fault lies squarely with the senior management that took those companies down that course. The final chapter has yet to be written for these firms but it sure doesn’t look like the right decision at this point.

The shareholders of the three companies that saw the REIT opportunity and charted their own course through a complex and somewhat risky maze were very well rewarded relative to the others. All three of these companies actually acquired land over the five year period. What a difference is made by good strategic decisions on the part of senior management. History pins the Gold Medal on Rayonier’s senior management team. –Brian

Funding Fire Control

I live in a 20 year loblolly pine plantation in the Lowcountry of South Carolina. Fire has long been a part of life here. From the fire ecosystem implemented by Indians centuries ago to the cooperative (S.C. Forestry Commission, U.S. Forest Service, International Paper and Westvaco Corp.) fire control efforts of a decade ago, fire has been an important part of life and forest management here. As industry disposed of it's timberland, the burden shifted to the Forestry Commission and, to a lesser degree, the U. S. Forest Service (Francis Marion National Forest). As smoke related lawsuits from prescribed burning increased, prescribed burning declined and fuel loads have increased. This all has happened in the face of declining budgets for both fire control organizations. What has happened in the Lowcountry is a microcosim of the situation in the entire South and, to a lesser degree, the entire nation.

In recommendations to the Subcommittee on Interior, Environment, and Related Agencies regarding the FY2009 Budget for the U.S. Forest Service, George M. Leonard - Chairman, Board of Directors, National Association of Forest Service Retirees had this to say:

"The most critical issue that needs to be addressed in the Forest Service budget is the funding of fire suppression. The current procedure of including the ten-year average cost of fire suppression within the agency’s discretionary budget is destroying the capability of the Forest Service to carryout the remainder of its statutory missions. From 25 percent in FY2000, fire funding is now approaching 50 percent of the budget. The suppression cost trend means the ten-year average is going to continue to grow, further cannibalizing funding for other programs. While the overall Forest Service budget has increased nine percent over the last six years, the diversion of funds to fire suppression has had a major impact on the workforce available to carry out the multiple-use mission of the agency. The number of foresters, biologists, and other resource specialists, along with supporting technicians, is a good measure of the capability of a resource management agency to carry out its mission. As illustrated in the following table, the capability of the Forest Service has been seriously compromised."

You get the point, but if you want to read more, go here.

The SC Forestry Commission's situation is equally as bad, perhaps worse. Here are a few facts.

When adjusted for inflation, the current budget is 30% less than it was in 2001.
• Aging firefighting equipment is not being replaced on a timely schedule.
• Fuel costs are soaring.
• Hiring and retaining qualified firefighters is difficult due to a more urban economy and changing demographics.
• Forest industry changes have led to a loss of cooperator capacity, both personnel and equipment.
• Recent housing development has expanded into wooded areas, creating communities with very high fire risk.
• Forestry has a tremendous impact on SC’s economy: #1 employer, #2 payroll, #1 harvested crop, $1 billion in exports, $17 billion total economic impact.
• The Commission’s $18 million baseline budget investment is supporting a $17 billion industry economic impact, a multiplier of almost 1000.

If you have a home in SC, or own/manage timberland here, now would be a good time to contact your Senators in support of this years budget request, in particular, the members of the Senate Finance sub-committee responsible for reviewing the request. Those are Senators Yancy McGill from Williamsburg county, Larry Grooms from Berkeley county, Phil Leventis from Sumter county, and John Drummond from Greenwood county. By the way, these senators have been very supportive of forestry and fire control. Something to keep in mind the next time you go to the polls!

This post may appear to be somewhat local in nature but be assured that the words that you have read apply right outside your door, to your timberland and to your National Forest as well. What are you going to do about it? --Brian

Forest Nurseries and ArborGen

One of the stated concerns as timberland moves from industrial ownership to investor ownership is "Where will the seedlings come from?" Investors want the timberland but not the nurseries.

International Paper, in particular, had a large forest seedling production capability. MeadWestvaco, although with less production capacity, also has outstanding seedling capability. Loss of these quality nurseries would be significant from a forest production standpoint and probably from a seedling cost standpoint.

Several years ago, a forest biotechnology company, called ArborGen, was created by I-P, MWV and Fletcher Challenge. Fletcher Challenge was later broken up and the Rubicon piece became the partner in ArborGen. The thinking behind ArborGen was that it might make more sense to combine existing technology and future research dollars than for everybody to do their own thing. The idea took, not quickly, and ArborGen was born.

ArborGen's product is improved tree performance through biotechnology. The product's package is the seedling. The founders have now provided ArborGen with all the packaging they need! All United States nurseries belonging to International Paper and MeadWestvaco are now owned by ArborGen. Rubicon's New Zealand and Australian nurseries are now owned by ArborGen. Along with the nursery operations come the seed orchards, germplasm, researchers, more technology and more intellectual property. ArborGen is entering a new era. Read the news release here. Visit ArborGen here. --Brian