A BRIEF TIMO BACKGROUNDER

In discussions with newcomers considering investments in timberland or the publicly traded timber REITs, I frequently find that there is substantial misunderstandings about what a TIMO is and what the TIMO role is in the investment community. This backgrounder is intended to answer those questions. For a much deeper understanding of TIMOs, here is a link to an outstanding and in depth report prepared by Cliff Hickman with the U.S. Forest Service. It was prepared in early 2007 so some of the numbers are out of date but, other than that, it is the best researched report on TIMOs and REITs that I have seen.

What is a TIMO?

A Timberland Investment Management Organization. Note that the first word is timberland, not timber as it is so often written. There is a big difference. Timber refers to trees, timberland is land with trees on it! Many news articles in well-known financial news publications (WSJ, Barron's) have confused the two in recent years, which has led to significant confusion surrounding pricing and values of timberland. The second key point is that TIMOs do not own land; they buy land, manage it and sell it for their clients. They have teams experienced in both forest management and portfolio management. For this advice and service, they charge a fee.

Some history…

During the 1980’s, institutional investors began recognizing the value of adding timberland to their portfolios. By the early to mid 1990’s, there was a call by many analysts in the investment community for the pulp and paper companies to monetize their timberlands to reduce debt. More favorable federal income tax rates and accounting policies applied to the TIMO’s clients than the pulp and paper companies, which made the timberland more valuable for the former compared to the latter. Growth of the TIMOs was rapid as investors sought to acquire timberland and the pulp and paper companies sought to dispose of it. The companies that did not sell their land generally converted to the REIT form of corporate structure to provide higher after-tax returns for their shareholders.

Who are the TIMO’s clients?

They are large institutional investors with a focus on financial objectives, many of which are tax exempt. Specifically:

• Pension funds
• Public retirement systems (CalPERS, the California public employee retirement system, was one of the first and largest timberland investors). European pension funds invest in U.S. timberland also and U.S. funds own timberland in other countries.
• Corporate pension funds
• University endowments (Harvard and Yale were among the first institutional timberland investors)
• High net worth individuals and families
• Hedge funds
• Foundations

Note that the clients are all large investors.  The largest clients generally acquire land in separate accounts while some of the smaller clients participate in accounts with commingled funds. TIMOs are not structured to accommodate most individual investors (there are other good options for individuals though).

How do TIMOs differ from the so-called Timber REITs?

TREITs, or Timber Real Estate Investment Trusts, own the timberland, TIMOs do not. The publicly traded TREITs are Plum Creek (PCL), Potlatch (PCH), Rayonier (RYN) and soon to be Weyerhaeuser (WY). The tax structure for REITs allows the profits to be passed through to the shareholders avoiding the double taxation associated with the C corporations. That tax efficiency is why Weyerhaeuser is converting to a REIT.

How much timberland do the TIMOs manage?

The TIMOs manage approximately 25 million acres worth more than $30 billion. The three REITs (not counting Weyerhaeuser) own about 11 million acres worth about $15 billion. Including Weyerhaeuser, the REITs own about 17 million acres worth about $28 billion.

Who are some of the TIMOs?

Below is a list, in alphabetical order, of some of the largest TIMOs. All of them have web sites that you can google to get additional information about them.

• Conservation Forestry
• Forest Capital Partners
• Forest Investment Associates
• Forest Systems
• Global Forest Partners
• GMO Renewable Resources
• Hancock Timber Resources Group
• Lyme Timber Company
• Molpus Woodlands Group
• ORM/Pope Resources
• Resource Management Services
• RMK Timberland Group
• The Campbell Group
• The Forestland Group
• Timberland Investment Resources
• TimberVest
• Wagner Forest Management

Are there differences between TIMOs?

Yes. They have different investment philosophies that appeal to investors with differing objectives. For example, The Forestland Group invests primarily in natural forests, particularly hardwood. The Hancock Timber Resources Group puts an emphasis on forest technology to improve timber yields and financial returns. Some TIMOs focus on acquiring “conservation land” or land that can have “conservation easements” quickly sold and separated from the fee ownership. Some TIMOs have good information systems with strong financial controls and some do not. Some conduct field audits, some do not. Some have outstanding technical groups in-house, some contract it outside. Some manage the timberland themselves and some contract with consulting foresters. All of these issues should be weighed by investors and the right TIMO selected based on the objectives of the investor.

This post can be downloaded as a pdf here. Visit  the Timberland Strategies web site here. --Brian

Email: jbfiacco@gmail.com

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

The Vertically Integrated TIMO?

One of my readers pointed out an interesting development to me recently. As has become so obvious, the vertically integrated forest product companies (VIFPC) are almost a thing of the past due to the elimination of favorable capital gains tax rates and the high tax rates on C corporations. The pass-through tax structure for TIMOs (pension funds) and REITs has pretty well destroyed the VIFPC as a viable tax structure. So the new landowners and managers become true timberland companies unburdened by the tax structure brought by those pesky mills.

The interesting observation is that The Forestland Group has recently completed the first part of the purchase of Roy O Martin's LeMoyen, Louisiana, hardwood sawmill, 10,000 acres of hardwood timberland, and 20-year harvesting rights on an additional 138,000 acres of hardwood timberland in south Louisiana. Read more.

Now back up about two years to when Anderson-Tully "merged" with one of The Forestland Group's funds. ATCO had a huge hardwood sawmill in Vicksburg billed as the largest hardwood sawmill in North America. You can read about that transaction here.

So now we have a new acronym (we need a new acronym), the VITIMO! It will be interesting to watch this trend develop, if it is a trend. When The Forestland Group buys its first pulp mill, I'll know its for real! --Brian

The Forestland Group to Buy 100,000 acres in Wisconsin

TFG reportedly has purchased (or will purchase?) 100,000 acres of timberland from Plum Creek in Wisconsin.

"the timber on the lands sold to TFG includes a variety of species and age classes. Besides the 16,300 acres in Sawyer County, the sale includes 12,000 acres in Rusk County, 69,700 acres in Oneida County, and lesser acreages in Price, Forest and Langlade counties."

"When asked by the Record what Plum Creek’s objective is in selling these lands, Wilson said that Plum Creek “regularly evaluates its holdings to determine the best economic use for every acre, and this was a market opportunity for the company."

"As the largest private owner of hardwood timberlands in the United States, TFG currently manages approximately 2.1 million acres in 17 states in the eastern U.S."

Read the entire article in the Sawyer County Record. --Brian

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.