TimberVest and GMO TIMOs Share $60 million

The San Bernardino County Employees Retirement Association is recognising Timberland as an asset class separate from Real Estate and, with that recognition, is doubling the amount of money to be invested in timberland to 4% of its portfolio.

According to IPE Real Estate:
"The outcome of a recent fund board meeting was that the pension fund made two commitments to two timber commingled funds. One was a $30m ($22m euros) to the Timber Vest Partners II fund, which will be a commingled fund with a total equity raise of $600m. The investment strategy is to invest in timber in the US."

"San Bernardino County also allocated $30m to invest in GMO Long Horizons Forestry Fund. This commingled fund will have a total equity raise in the neighborhood of $300m to $350m. This investment fund will be looking for assets in the US and internationally. "

The pension fund is expecting a real rate of return of 6% over the next 10 to 20 years. Reportedly, the fund will be ready to invest another $40 to $60 million in Q1 and Q2 of next year. Read the entire article here. --Brian

MWV to Announce Plans for SC Timberland

According to Columbia's "TheState.com", MeadWestvaco will be announcing it's long awaited plans for 400,000 acres of timberland in the Lowcountry of South Carolina. This article, and another in the Charleston Post and Courier, reported on a Friday briefing by John Luke, MWV's CEO, in North Charleston which included key people from SC's state government, agencies, conservation groups and community leaders. Details of the plan were not announced at the meeting.

"Spokeswoman Donna Cox said she could not answer questions about the property’s future. 'We are going to announce the details of this plan with our earnings call mid-week next week,' Cox said Friday." That conference call is scheduled for Wednesday morning.

The following is an extract from the Post and Courier:
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But the fate of the rest of its holdings has sparked anxiety about growth and development in the Lowcountry. MeadWestvaco owns about 145,000 acres on the outskirts of the greater metro area, land that for decades has acted as a passive growth boundary west of Charleston and to the north of Goose Creek.

The uncertainty escalated last fall when a top MeadWestvaco executive suggested that the company was considering selling some or all of its remaining acreage in the United States, telling a group of investors: "We believe there is significant value to be unlocked in this asset."
Conservation advocates have been fretting ever since that some or all of the company's local property will be put up for grabs, opening it up to home builders or large-scale commercial real estate developers.

That was not the message Luke gave at Friday's meeting.

The person who attended said the fact that the CEO traveled to Charleston to deliver it in person, however vague, gave some weight to the matter, considering the audience.
"You don't go calling in people who sit on boards and staffers from Columbia to Charleston and pledge to put conservation as your highest priority and then go back on your word," the attendee said.

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Read the articles from "The State" and the "Post and Courier"

According to MeadWestvaco: "The live conference call and presentation slides may be accessed on MeadWestvaco’s website at www.meadwestvaco.com. After connecting to the home page, look for the link to Investor Information, then Financial Calendar, to access the webcast. Go to the website at least one hour prior to the call to register, download and install any necessary audio software."

Kudos to Weyco!

While politicians promote corn, sugar beets and other annual crops, Weyerhaeuser and Chevron have announced an alliance to "assess the feasibility of commercializing the production of biofuels from cellulose-based sources". Kudos to Weyerhaeuser, Chevron and capitalism!

"The two companies said the partnership reflects their shared view that cellulosic biofuels will fill an important role in diversifying the nation's energy sources by providing a source of low-carbon transportation fuel. The venture leverages the strengths of both companies, combining Chevron's technology capabilities in molecular conversion, product engineering, advanced fuel manufacturing and fuels distribution with Weyerhaeuser's expertise in collection and transformation of cellulosics into engineered materials, innovative land stewardship, crop management, biomass conversion and capacity to deliver sustainable cellulose-based fiber at scale." The entire news release is well worth reading.

On April 4th, Roger Sedjo with Resources for the Future, moderated a session on Biomass Energy: Biorefineries. All of the presentations are available at the previous link but I found the presentation by Theodore H. Wegner, Assistant Director, Forest Products Laboratory to be particularly informative. It is an outstanding look at the current situation while clearly laying out the hurdles that must be overcome to begin using wood to replace oil. --Brian

What to Teach?

A former colleague of mine and professor at Virginia Tech, Dr. Stephen Prisley, dropped by over the weekend to say Hello and catch up on what has been happening over the last few years. As it always does, the subject eventually shifted to the changes that have occurred along with the nation's shifting timberland ownership. Steve's statements centered on the question "Are we at VPI teaching the right things to the new crop of foresters?"

For many years, Steve and I worked together as "industrial foresters". That term is almost an anachronism today! There are a few left at MWV, Weyerhaeuser is a holdout (for now at least) and some of the timber REITs do have minimal industrial holdings but, by and large, it appears that the day of teaching a crop of students for the industrial forestry market is over. In the area of industrial forest research, of the big three (International Paper, MeadWestvaco and Weyerhaeuser), only Weyerhaeuser remains. Most of my MWV forest research colleagues have returned to universities, gone somewhere in government, or in the case of one biometrician, went to work for HP where his skills were better rewarded financially.

But timberland must still be managed by someone so the questions are "Who" and "How does that affect how the new forestry students should be educated". The "who" part of the question is easily answered. TIMOs and the consulting foresters that serve them. Some of the TIMOs and TREITs mange the land themselves and some employ consultants to do the job for them. Either way, the basics of silviculture have not changed and they must still be taught. What has changed is the objectives of the landowner. The primary objective of growing a crop to supply mill furnish is generally not an objective of the new owner (even with fiber supply agreements). The new primary objective of TIMOs and TREITs is one of financial return which suggests that universities must strengthen efforts on teaching the tools that accomplish that objective. This includes not only a new emphasis on the traditional financial tools but on those, such as harvest scheduling, which are specific to timberland management. --Brian

160,000 Acres in Adirondacks Changing Hands?

The following info was taken from two different news releases on Finch, Pruyn's web site.
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GLENS FALLS, N.Y. — Richard J. Carota, Chairman of the Board of Directors of paper manufacturer Finch, Pruyn Co., Inc., has announced that the Board of Directors has voted to recommend that the company’s shareholders accept an offer from Atlas Paper Resources LLC to purchase all of the company’s assets, including its manufacturing facilities in Glens Falls, N.Y., and its Adirondack forestland. The shareholders will vote on the transaction at a meeting on Tuesday, April 24, 2007.
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Finch, Pruyn has owned and cared for the vast majority of its 161,000 acres of forestland in New York State’s famed Adirondack Region since the early 1900s. In 1910, the company increased its contributions to modern forestry with the hiring of one of the nation’s first professionally trained foresters, Howard Churchill. Today, the company employs 11 professional foresters who oversee company lands and the purchase of wood from outside sources.
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Get more details from Finch, Pruyn's web site.

Atlas Holdings is a diversified private investment firm whose ownership includes Forest Resources LLC which reportedly owns four paper mills and nine packaging plants. Based on their web site, it looks like Atlas has been a very aggressive buyer in the past year. --Brian

Potlatch to Sell it's Hybrid Poplar Plantations

The following was extracted from Potlatch's news release. --Brian
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"Potlatch Corporation (NYSE:PCH), a real estate investment trust (REIT), has announced the sale of the company's 17,000-acre hybrid poplar tree farm in Boardman, Oregon, to a private-equity tree-farm investment fund for $65 million. A definitive purchase agreement was signed today and closing is expected during the second quarter of 2007. ...
This 17,000-acre property is certified under the stringent forest practices guidelines of the Forest Stewardship Council (FSC), along with the remaining 1.5 million acres under Potlatch ownership. Development of the unique Boardman plantation was started in 1992 to supplement Potlatch's fiber needs...
"After spending the past year evaluating the best path forward, and meeting with a number of interested poplar-focused operators, we are pleased to have reached an agreement with a global leader in the hybrid poplar industry who we believe is better positioned to deliver greater value from the operation," said Chairman, President and CEO Michael J. Covey." Read the entire news release.

Ethanol from Trees, Not Corn!

Before I start on the corn rant again, there are a couple of recent articles that I found interesting. The first is kind of a summary, from an investor/financial perspective, of the shifting ownership from industry to investors that was done by Laura Mandaro with MarketWatch. See "For-sale signs pop up on U.S. timberlands". Some interesting facts.

For an update on what is happening in the State of Washington, click here. The focus is on the loss of timberland to development. There are references to Hancock, Weyerhaeuser, Port Blakely, UW and the Forest Service.

On Feb.3, disappointed with President Bush's push for corn ethanol, I wrote "Perhaps soon a President will wake up to the fact that he/she has a nation with forests capable of providing ethanol (and other forms of fuel) and a very capable research team already in place that is capable of making it happen". I doubt that Dubya spends much time reading blogs but I am certainly glad that he woke up and is now making research commitments to "cellulosic" ethanol!

The obvious outcomes of the corn ethanol push are already well under way. Corn prices have jumped. Today's newspaper reported farmer's intent to increase the acreage in corn by 15% (farmers are no dummies, they have already sold a portion of that harvest at these increased prices). Most of the new acreage in corn will be at the expense of other crops, like soybeans and milo, meaning we will see price increases in many other foods plus the many non food products manufactured from soybeans. If the corn thing isn't halted quickly, there will be a new rash of conversion from timberland to farm land. When the shift to cellulosic ethanol occurs, some folks will be holding the bag as corn prices drop substantially. The only thing that will hold corn prices up will be farm subsidies funded by us good old taxpayers. And in a double whammy, we will have higher food prices as well. There is a certain odor about this. To put it bluntly, it stinks of farm belt politics!

But things are at least moving in the right direction (slowly). The following appeared in a recent issue of the Forest Landowners Fast Facts newsletter.
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New Wood Biomass Coalition Formed

Recently, FLA lobbyist Frank Stewart participated with other representatives from like-minded groups to help effectively organize to "provide advocacy, education, information, and outreach to public and private entities that promote research, development, and funding for sustainable woody biomass utilization and markets."
As a result of that organizational meeting, the coalition adopted the name, "Woody Biomass Committee," and set goals, including: · Reduce America's dependence on foreign oil and improve the nation's national security position · Improve forest health · Create new markets for renewable fuels, including woody cellulosic ethanol in rural America, which will promote economic opportunities and growth while supplying a sustainable supply of woody biomass for all biomass/bioenergy products
These are certainly aspirations in keeping with FLA ideals for the 110th Congress, which are: · Statutory and regulatory definitions of "wood biomass" should be defined as "wood" and not simply as wood residues, wastes, and/or byproducts. · Wood biomass must be a full partner with other cellulosic feedstocks in all bills, laws, regulations, and other federal initiatives. · Markets for wood biomass must be developed to maintain forestland investments as vital, so forestland investors continue to hold their land as forestland. Without suitable markets, forestland divestitures may increase.
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There was also an article in the last NC State alumni magazine with a focus on research aimed at reducing lignin in cottonwood specifically for ethanol production (although originally the research was done for pulp production). So, overall, research is beginning to shift from pulping to energy production in support of the new role that timberland will soon play. --Brian

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!

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

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.

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.

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

Auditing Timberland Silvicultural Activities

This is a sensitive subject but it needs surfacing. It applies to all organisations that are subject to financial audits. Many, perhaps most, financial audits of timberlands operations are pretty much worthless and provide a false sense of security. An effective audit of their revenue/expenditures for activities such as timber sales, site preparation, tree planting and road construction must have four components to have any level of credibility. They are:

1. the convention financial audit
2. a report of activities showing the pertinent information by an I.D. number (sale, stand, activity, etc).
3. a map with corresponding I.D. numbers
4. A field audit that verifies that what is on the ground is consistent with what has been reported. (i.e. stand 1521 is actually 156 acres of loblolly pine and is stocked reasonably close to the reported level).

So..., if you have an investment in timberland, did your forest managers audit meet these requirements for both revenue and expenditures. From my experience, there are three requirements necessary to make this happen.

First, the senior manager team must include foresters so there is a solid understanding of what is happening on the ground. You would think that this would be a given but it is not true in all TIMOs.
Second, a management information system capable of reporting those activities (the report) and capable of saying exactly where the activity took place (the map). This requirement is generally met in the form of a Geographic Information System.
The final requirement is a management team willing to make it happen. This type of an audit can expose weaknesses in even the best of organisations. Properly executed, these audits will not only assure investors but will also form the basis of improved operations.

When I was with the Forest Technology Group (responsibilities included both development and sales of webFRIS at various times) I had the opportunity to see the information systems of many forestry companies, TIMOs and state forestry organizations. In the process, I also noted a huge difference placed on the value of solid information by different organisations. The organisations with the best systems wanted even better systems. Some organisations had virtually nothing and little interest in obtaining the type of system required for adequate timberland management. If there were no foresters in key roles, there was little priority placed on good information systems or field audits. And I am convinced that those in charge did not recognize their vulnerability. The long term nature of forestry investments has the capability of masking poor management control. But sometimes, the chickens do come home to roost.

There is an alternative to a willing management team - an investor that requires it. As President Reagan put it - "Trust but verify".

Forest Fragmentation and Logging

As many people have noted, one of the impacts of the changing timberland scene associated with the HBU sales is forest fragmentation. This is generally regarded as a bad thing but, as I have noted before, it has many positive benefits as well. Either way, it is a reality and certain issues need to be addressed if we expect to practise forestry on these smaller tracts of land.

At one point in my Westvaco career I was responsible for monitoring the global fiber supply. The supply/demand situation was fairly straight forward for most countries but Japan was a real paradox. Japan was purchasing chips from all over the world but hitting our Southern ports very hard. They were importing large amounts of logs from our West Coast and moving aggressively into the Chilean radiata market. On the surface it was obvious that Japan was clearly using more wood than it could possibly grow. But the growth/drain ratio, and herein lies the paradox, told a very different story. Japan was not only growing more wood that it was cutting but Japan was actually growing more wood than it was using! So what was happening?

Forest fragmentation was so severe that harvesting costs were so great that it became cheaper to buy and pay heavy transportation costs than to harvest locally. Will this happen to us?

To a degree, yes, it will happen to us. But we certainly don't have to follow in Japan's footsteps. These smaller tracts of land forming the "family forests" represent an opportunity for a logging model that leaves a "kinder, gentler" footprint on the landscape. Yes, logging costs will be higher and landowners will have to accept less for stumpage than a traditional, high capacity logger can afford to pay. But the Japan experience says that some of the higher production costs would be offset by lower transportation costs.

Question: What is the key to capturing the forest products from the smaller family forests? Answer: Wood Procurement management willing to supplement existing harvesting systems with producers capable of low-impact (and lower production rates) systems. Higher logging costs in return for lower transportation and stumpage costs. Given the current state of the domestic pulp and paper industry, its doubtful that we will see anything significant along these lines anytime soon. But wood demand will increase (nature abhors a vacuum) and this opportunity will present itself in the not to distant future.

Temple-Inland's Timberland for Sale

Temple-Inland has announced that it is splitting the company into three pieces and selling its "1.8 million acres of timberland in Texas, Louisiana, Alabama and Georgia." This should cause a little excitement among the TIMOs along with some late night and weekend work for a few folks!

Icahn's comments: "Temple-Inland's management and board of directors should be commended for listening to the concerns that we and other shareholders have expressed and for announcing plans to take the actions we suggested" Looks like he made his money without a takeover. The stock was up 13% on yesterdays news. Click here for a little more detail.

Hancock in New Zealand

The following is from yesterday's Manulife's earning announcement:

"The Hancock Timber Resource Group (HTRG) announced the acquisition of approximately 200,000 hectares (494,000 acres) of New Zealand timberland and forestry rights. The properties are plantation forests that bring the total under HTRG management in New Zealand to approximately 296,000 hectares (731,000 acres)."

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.

GMO, Tennessee and the Nature Conservancy Deal

GMO, a Boston based TIMO, is reportedly working on a deal that would add 124,000 acres of timberland to the State of Tennessee's land holdings. Tennessee estimates the value of the timberland at $148 million. The deal apparently includes both fee land as well as conservation easements. The Nature Conservancy and the Lyme Timber Company are both involved in the proposed transaction as well. Read about it in more detail.

MWV Selling, Molpus Buying

According to the Ledger-Enquirer in Columbus, MWV is getting out of the forest management business in GA and AL. It is actively seeking buyers for 227,000 acres there plus an additional 63,000 acres in WV. An MWV spokesperson is quoted as saying that 35 people in the Forestry Division will be "affected" by the sale. You can read the article here. This morning Goldman Sachs raised its rating on MWV from a "sell" to a "buy" based on its land sales strategies. In the recent MWV news releases, a great deal has been "unsaid" about the future of MWV's SC mill and timberlands although there is certainly no shortage of rumors. MWV is also reportedly looking for a buyer for it's nursery and seed orchards.

On the other side of the nationwide acreage flip, "The Molpus Woodlands Group, LLC, a timberland investment management organization, headquartered in Jackson, Mississippi, has completed the purchase of approximately 44,379 acres of timberland located in LeFlore and Pushmataha Counties in southeastern Oklahoma on behalf of an institutional investor. The transaction closed on January 25, 2007." Molpus now manages 557,000 acres in the South.
Read the entire news release.

Increasing Investor Interest in Timberland

If you have been watching the stock price of the timber REITs for the past few months, you should have noticed some pretty dramatic gains (way above all market indices!). Plum Creek went from about $34 into the low $40's. When they announced lower earnings and a less than optimistic outlook, the stock price barely hiccuped. Potlatch is up. Rayonier jumped. In fact, during the last 30 days when the S&P jumped about 1.5%, PCL, PCH, RYN, TIN, WY, & JOE are all up from 6% to 12%! What's happening?

Private investors are looking for the pure timberland play but it's hard to buy a tract of timberland (at least in a knowledgeable manner). And that timberland is not too liquid either but a share of one of the above companies is. And private investors with the big bucks have the same thing in mind. Example: Carl Icahn moving heavily into Temple-Inland.

On the institutional investor side, the demand for timberland just keeps building and getting more competitive as more institutional investors recognise timberland as an asset class in itself. What started with institutional investors here in the U.S. is now spreading world-wide at a pretty fast pace. Here is an interesting article that illustrates the increased interest by investors in Europe. All told, there is a lot of money chasing timberland with no outlook on the horizon suggesting that the demand will decline anytime soon.

BAM!

This mornings news and 558,000 acres shifts hands. Longview is a REIT and Brookfield will apparently continue to manage it as such. Will they keep the mill and container plants?? --Brian

"Brookfield Asset Management (NYSE and TSX:BAM) (“Brookfield”) and Longview Fibre Company (NYSE: LFB) (“Longview”) today announced they have entered into a definitive agreement for Brookfield to acquire all the outstanding shares of Longview for cash at a price of US$24.75 per share, for a total transaction value of approximately US$2.15 billion including assumed debt... With this transaction, Brookfield will acquire 588,000 acres of prime, freehold timberlands in Washington and Oregon , the heart of the Pacific Northwest . The high value species, excellent growth rates and significant standing timber inventories make these timberlands among the most valuable in the world. In addition, Brookfield will acquire one of the largest pulp and paper complexes in North America at Longview , Washington , and a network of 15 corrugated container plants located in 12 states.
“Longview Fibre represents an excellent opportunity to acquire one of the largest and highest quality portfolios of freehold timberlands in the U.S. , furthering our strategy of investing in high quality assets that generate long term sustainable cash flows that increase in value over time,” commented Sam Pollock, Managing Partner. “We already manage 2 million acres of timberlands in North and South America, including 635,000 acres on the British Columbia west coast, proximate to Longview's timberlands in the Pacific Northwest. The acquisition of Longview 's timberlands will significantly expand our timberland asset management operations and solidify our position as the fourth largest owner/manager of timberlands in North America by value.”
Read more about it.

The Most Important Change...

in timberland today is clearly the shift in ownership from forest industry to TIMO's, government and NGOs. I have heard many comments suggesting that the shift to TIMOs is a bad thing but, if we believe in capitalism and free markets, then we have to think otherwise. Good or bad, though, is like beauty - its in the eye of the beholder. One person would think that all of the IP lands that went to the Nature Conservancy was a great change. A mill owner needing hardwood sawlogs might not think it was so good!

But one thing is for sure, things will be different and that is not just in the eye of the beholder. Let's throw out for thought what some of those changes might be. First, what about productivity of the land from the perspective of forest products. There is a lot that goes into this ranging from silvicultural investments to the length of ownership. The forest industry's ownership horizon used to be to own timberland "forever". Not so for TIMOs which normally have a relatively short time horizon and factor in the value of "flipping" HBU (Higher and Better Use) lands at the time of acqusition. I once bought a tract of land in Mississippi at a very favorable price because the owner felt that if he sold to a paper company he would never have to worry about having neighbors close by because the land was sold for building lots. Those days are gone. TIMOs are clearly more likely to capitalize on the HBU lands than industry did historically. This pulls forest land out of productivity (not a bad thing, just a fact).

Recently while attending a Tree Farm meeting I was listening to comments about how the TIMO sales of HBU lands to homeowners and hunters was creating a serious forest fragmentation issue which I suppose is somewhat true. What wasn't said is that these sales are also creating a wonderful opportunity to bring many more people into the Tree Farm System and to add to the political strength of those owning Family Forests. So there are pros and cons surrounding fragmentation.

Productivity is greatly impacted by silvicultural investments, particularly in young stands. I'm not sure how TIMOs compare to forest industry on that issue. I know some TIMOs that practise very intensive forestry and some that do minimal work and just hope the value increases. There is a big difference between TIMOs. But guess what - there was/is a big difference between companies in the way industrial land was/is managed. I'm not sure what or if there is a net difference.

In the area of basic research and developing and implementing technology, the TIMOs clearly fall down. The historically long term view of industrial firms is absent with the shorter time horizons of TIMOs and basic research is gone. TIMOs seem to be very good at implementing proven technology if, and only if, the gain will show up in the next annual appraisal. Forest research must come from academia and government in the future, right? Maybe not. Capital markets will come to the rescue and provide the technology needed (you do have faith in capitalism!). As industry disposes of its nurseries and research wings, a new industry will emerge to provide those products and services (we are already seeing it develop) and my guess is that the new industry will deploy its capital more efficiently that has been done in the past.

Now let's think about fire control. As industry has sold land it has also disposed of, or significantly scaled back on the fire fighting assistance that it has provided to state fire control organizations. When the largest timberland owner in the U.S. sold its lands to TIMOs and NGOs, the seller no longer needed fire control equipment and its pretty safe to say that the new owners had little interest in maintaining fire control personnel or equipment (somebody tell me if I'm wrong!). Now, what about our faith in capitalism and the thought that capital will flow to meet this need. Perhaps the faith is misplaced here and these new buyers (TIMOs, NGOs, Tree Farmers, homeowners, hunters. etc) need to step up to the plate and provide very strong support for funding of state forest fire control organizations. That means through both lobbying and increased taxes on forestland focused 100% on improved fire control. This will not happen until after a major calamity. In the meantime, state fire control budgets will shrink (in real dollars) as government finds "better" places to allocate its expenditures.

So..., what's the net change in productivity as a result of all these changes? My guess, and that is all that it is, is that productivity goes down mainly as the result of a decline in productive acreage. That's bad. Or is it. Pulpwood demand has dropped significantly in the U.S. so maybe the productivity decline will be a good thing. Or maybe we will come to understand that people would rather eat than have gasoline made from corn ethanol. Or see timberland and wildlife habitat cleared for corn fields. Perhaps soon a President will wake up to the fact that he/she has a nation with forests capable of providing ethanol (and other forms of fuel) and a very capable research team already in place that is capable of making it happen. Then forest productivity will once again be a major issue and timberland investors will be smiling. And capital will flow to forest research! and to silvicultural expenditures! and to fire control! But that's a thought for another day. --Brian

About This Blog

The timberland picture in the U. S. has changed dramatically during the past decade and clearly will continue to do so. The objective of this site is to monitor those changes and to think through their implications. Are the changes good or bad and who gets to determine what good is? As timberland shifts from industrial ownership to TIMOs, what are the implications? As TIMOs dispose of land, what are the implications? That's what I want to think about and to provide something of a forum for other's thoughts. What do these changes mean to investors, hunters, the forest industry, environmentalists, tree farmers, foresters and ordinary citizens who could care less but are none the less impacted. 2/3/07 --J. Brian Fiacco