UBC Forestry 465 Lecturewood465-kozak.sites.olt.ubc.ca/files/2013/01/465... · Global Hardwood...

UBC Forestry 465 Lecture

Global Forest Supply

&

Private Forestland Management

Chris Boniface

• Provide and outlook of Global Forest Supply to 2025

• Discuss drivers and valuation modeling for Private Timberland

Investments

Objective

2

Global Forest Supply

3

Global Forest Regions are well delineated

4

Global Supply Regions Have Significant Volumes of Standing Timber – but

Environmental Concerns, Access Issues and Ownership Limit Harvest

Global Timber Availability (mnm3)

5

Timber Ownership Patterns Differ Globally and Drive Different Harvest

Responses

Global Timberland Ownership

Public ownership

Private Ownership

High % of US Private Timberlands

managed under tax-efficient

structures

Pacific North West

TIMO – Timber Investment

Management Organization

REIT – Real Estate Investment Trust

MLP – Master Limited Partnership

US South

40% - TIMO/REIT/MLP

60% - NIPF (Non Industrial Private

Forestlands)

6

Mountain Pine Beetle outbreak in B.C. will reduce annual harvests by 20

million m3 by 2025

• The Mountain Pine Beetle has killed over

50% of the Lodgepole Pine in British

Columbia

• The decrease in harvest will hit the BC

interior unevenly – with some experiencing

very little decline while other regions

experience significant declines

0%

20%

40%

60%

80%

100%

0

200

400

600

800

1000

'00 '02 '04 '06 '08 '10 '12 '14 '16 '18 '20 '22 '24

Million m

3

BC Beetle Attacked Timber (cumulative)

MPB Attached Timber Percent Pine Killed

61 5949

41

0

10

20

30

40

50

60

70

Mn. m

3

B.C. Interior – SW Sawlog Harvest

AAC Impact 2016-2025

East Prince Rupert -31%

Prince George -34%

Peace -10%

Cariboo -52%

East Kootenay -11%

West Kootenay -3%

Kamloops Okanagan -33%

Mackenzie -32%

7

Canadian softwood sawlog harvests will have declined by 40+ million m3 by

2025

5752

5550

54 5245

36

2823

30 2831 30

33 3641

0

10

20

30

40

50

60

70

80

90

100

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2025

Mn. m

3

Eastern Canada

Softwood Sawlog Harvest

7873

79

68

85 8780

75

62

51

6470 71 72

6872

56

0

10

20

30

40

50

60

70

80

90

100

Mn. m

3

Western Canada

-11

-31

8

Intensive forest management practices give US fiber baskets the ability to

raise their harvest 10 million m3 by 2025

6157 56 59

64 6760

55

4537 40

4448

52 54 54

70

0

20

40

60

80

100

120

Mn. m

3

US Pacific Northwest

99 9791 92

98104

93

75

65

54 56 5660

6367 70

109

0

20

40

60

80

100

120

Mn. m

3

US South


+3

+5

9

Europe’s harvest of softwood sawlogs is flat at previous peak levels, with

Russian supply expanding significantly

0

50

100

150

200

250

Mn m

3

Europe (ex Russia)

+2


0

50

100

150

200

250

Mn m

3

Russian (total)

+32

� The long-term (beyond 2025) impact of regional regulations currently under development as part of

Russia’s National Forest Policy is the opportunity to further increase the harvest of softwood saw

logs

10

The export of sawn timber is replacing log exports as a driver of Russian

harvest

23 24 28 28 31 35 36 35 25 18 16 16 13 12 14 15

0%

5%

10%

15%

20%

25%

30%

35%

0

5

10

15

20

25

30

35

40

Mn

m3

Russian Exports of Softwood Industrial

Roundwood

Export volume

Export share

7 7 9 10 12 14 15 17 15 16 17 19 19 21 22 22

0%

10%

20%

30%

40%

50%

60%

70%

80%

0

5

10

15

20

25

Mn

m3

Russian Exports of Softwood Sawn

Timber

Export volume

Export share

11

The South American hardwood pulp harvest (Eucalyptus) has expanded by 50

million m3- now accounting for 40% of the total industrial harvest

� SA harvest has grown by 57% between 2000-2015,

driven by eucalyptus pulp plantations

� 53% pulp harvest

� 22% Softwood sawlogs

� Establishment of plantations has been driven by

� industrial establishments (to secure fibre

supply)

� governmental programs

� and by a growing interest in forestry as a

financial investment.

� Growing competition for land from other purposes

such as agricultural uses and ecological/biodiveristiy

set asides.

� Not included in the industrial roundwood harvest,

Wood Fuel accounted for 44% of the total South

American harvest in 2015

0

50

100

150

200

250

Mn m

3

South American Annual Industrial Roundwood Harvest

Softwood Sawlog Hardwood Sawlog

Softwood Pulp Hardwood Pulp

Softwood Other Hardwood Other

12

Pine plantation area in Brazil, Chile & Uruguay has stagnated and loses

share to eucalyptus

� Brazil, Chile and Uruguay account for over 90% of

the South American SW sawlog harvest

� Pine (Radiata, Elliottii, & Taeda) accounts for 34%

of plantation species today in BR, CL and UY but its

share has been in long term decline

• Eucalyptus plantations are expanding due to

rapid growth rates and better returns for the

land owners

– Stagnating / declining pine plantations

• Limited incentive programs

• Competition for land

• Higher productivity

� CAGR of BR, CL an UY plantation development

(2000-2010):

– Total: 2.84%

– Pine: 0.18%

– Eucalyptus: 4.86%

� The stagnation of new pine plantations in recent

years is viewed as a constraint to future industrial

output in the region

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0

2,000

4,000

6,000

8,000

10,000

12,000

1990 1995 2000 2005 2006 2007 2008 2009 2010

1000 ha

Plantation Development (BR, CH, & UY)

Pine Ecualyptus Other pine share

34%

58%

8%

Uruguay Plantation Forest Land Composition by Species, 2010

Pine

Eucalyptus

Other

Broken

Timeline

13

Softwood sawlogs dominate the harvest in NZ and Australia, but a slowing

of new plantation development will mean a stagnation in the future harvest

Australia:

• With slow new establishments of plantations,

the prediction for future wood supply is flat.

• Modest growth in hardwoods though, mainly

in eucalyptus.

New Zealand:

• 50% of NZ log production is exported as raw

logs, due to lack of domestic processing capacity

• New plantations have decreased significantly

in recent years, which will decrease the long term

harvesting potential.

• Harvest will be limited by the size of the

mature plantations, the larger plantations are

running out and the harvest needs to move to

smaller plots with higher logistical costs as a

consequence.

• The harvest, dominated by softwood sawlogs,

will peak in the coming decade.

0

10

20

30

40

50

60

Mn m

3

NZ and Australian Annual Industrial Roundwood Harvest

Softwood Sawlog Hardwood Sawlog

Softwood Pulp Hardwood Pulp

Softwood Other Hardwood Other

14

Global Hardwood Harvest is Forecast to Increase to 700+ million m3 by 2020 – Driven

by Fast-Growing Eucalyptus Plantation in South America for Pulp

� Fast-growing Eucalyptus plantations in Southern Hemisphere can yield 30 – 50m3+ per ha per year of

growth, i.e. 125,000 ha yields 5 million m3/year of harvest after 5-7 years.

� Limitation is typically demand, construction and financing of pulp facility

15

Softwood Harvests are forecast flat to 2020 at 1 billion+ m3 – Driven by

Russian and Southern Hemisphere Increases and Canadian Declines

� Softwood is much slower-growing, averaging <20m3/ha per year in Southern Hemisphere and less than

5m3/year in the Northern Hemisphere.

� All the wood available for harvest in 2020 is currently “in the ground”.

� Canadian decrease from AAC reductions due to the Mountain Pine Beetle in British Columbia and

conservation set-asides in Eastern Canada.

� Russian standing mature timber is the main increase.16

Softwood Sawlogs account for 80% of the global softwood harvest, will

also be flat to 2005 peak

0

100

200

300

400

500

600

700

800

900

mnm

3

Softwood Sawlog harvest

North America Europe Russia Other

� The sawlog harvest will struggle to

meet the demand, putting pressure on

global sawlog prices

� China’s restrictions on native forest

harvesting reduces softwood log

supply by ~ 25 million m3

� Russia has the supply to expand the

harvest further but not the

infrastructure

+/- 0%

17

Canada shows the greatest decline in harvest levels, while Russia shows

the largest increase

-23

mn m3-11

mn m3

+3

mn m3 +5

mn m3

+32

mn m3

Supply Regions change in Softwood Sawlog Harvest from 2005 to 2025

-4

mn m3

+10

mn m3

+2

mn m3

18

• Globally lots of fibre, but constrained by harvest restrictions and economics

• 2025 available harvest volumes similar to peak of 2005, but global demand will have increased

– Softwoods 1+ billion m3

– Hardwoods .7+ billion m3

• Softwood Supply regions shift

– Declines in Canada and South America

– Europe neutral

– Increases in US South, Russia and Australia/New Zealand

• Upward pressure on timber prices

Key messages Global Forest Supply

19

Private Timberlands Investments

20

Timberlands investments are maturing and are part of a growing

broader group of investments called “Real Assets”

• Current market environment is leading investors across the globe to increasingly seek an alternative to

traditional equity and fixed income investments

– Real Assets

• Real Assets broadly defined as long-lived, hard assets that

– Generate stable and growing cash flow streams

– Provide enhanced current yield

– Offer protection against inflation

– Produce attractive risk-adjusted returns

• Allocations to Real Assets expected to reach 20% to 30% of professional managed portfolios by 2030

– $10 trillion of capital seeking Real Asset investment opportunities over the next 15 years

0 2000 4000 6000 8000 10000 12000 14000 16000

Agriculture

Timberlands

Utilities

Energy

Renewable Power

Transportation

Property

US $ billions

Global Real Asset Investment Opportunity Through 2030

21

Timberlands investments have attractive attributes to investors

• A sustainable resource investment with the ability to adjust returns between cash flow and capital

appreciation to preserve value through market cycles

• Stable, long term total returns driven by biological growth, which is independent of capital markets and

macro-economic cycles

• Attractive risk-adjusted total return investment with low correlation to other major asset classes

• Portfolio diversification benefit / deflation hedge attributes

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

0% 5% 10% 15% 20% 25% 30% 35%

An

nu

al

To

tal

Re

turn

(%

)

Standard Deviation (per year)

Timberland Equity and Fixed Income Total Returns 1995 - 2014

US 3 Month T-Bill

Barclay Bond Index

NCRIEF - Timberland Index

Plum Creek

S&P 500 Index

US P&FP Index

22

Timberlands position in the Real Asset Universe will be challenged to keep up

based on the finite size of investable universe

� Globally, Financial owners control 25

million ha of an estimated 130 million

ha investable universe

� Value wise, $100 billion of $250 -

$400 billion

� “Finite” resource of Investable

Forestland makes it unlikely that

Timberlands will grow at same rate as

other alternative real investments

� Will keep “downward” pressure on

discount rate

0

50

100

150

200

250

North

America

Europe Latin

America

Oceania Asia Africa

Mill

ion

He

cta

res

Private Ownership vs Investable Timberlands

Private Investable

0

2

4

6

8

10

12

North

America

Europe Latin

America

Oceania Asia Africa

Mill

ion

He

cta

res

Financial Investments in Timberlands 2014

TIMO REIT/Other

23

US Timberlands transactions over the last 5 years are averaging 2 million acres

at $3 billion USD per year

� Timberland transaction peaked from

2005 to 2008

� 2006 7.5 million acres $8.5

billion USD

� Current area and value

transactions are well below

these

� Financial (TIMO) transactions account

for 90% of sales

� 2013 Weyerhaeuser conversion

to REIT

24

Foundation of any Timberlands Investment is the Discount Rate - return

an investor must receive to account for risk

� Many names – capitalization rate or “cap” rate, hurdle rate, cost of capital

� Used in financial analysis as the interest rate for discounting expected future cash to adjust for risk and the time value of money

� Represents the sum of a benchmark risk free rate and a risk premium, which can be broken into two components

� Systematic risk (also known as non-diversifiable risk ) – Risk that is attributable to market wide economic forces, such as inflation, interest rates or business cycles that impact all investments to some extent

� Non-systematic risk (diversifiable risk or unique risk) – Risk that is specific to the investment

� Timberlands – Fire, Wind, Regulatory, Pest or Disease

� Properly used, discount rates match the specific risk of a Timberlands Region

� Forest valuations are extremely sensitive to the discount rate used due to the length of time between planting and final harvest – 30 – 80 years for conifers

� High discount rate favours short term projects, while a low discount rate favours longer term projects

� Risky investments (regions) employ higher discount rates, and safer investments lower rates

� Two types of Rates

� Real Rates – No Inflation

� Nominal – Includes Inflation

25

Four approaches are used to estimate Timberland Discount

Rates – but none are exact

� Discount rates represent the sum of a benchmark risk free rate and a risk premium broken into two parts

� Firm or asset class-specific risk (diversifiable)

� Market risk (non-diversifiable – affects all investments)

� Rates on the ten year U.S. Treasury Note serves as the benchmark or risk-free component

� Risk premiums based upon one or more of four general methodologies

Approach Key Assumption Data Required

Estimate using Capital Asset Pricing

Model (CAPM)

Market rewards investors for risk,

not for failures to diversify

Risk free rate, historical returns of a

suitable market index and of the

specific asset being considered

Calculate Weighted Average Cost of

Capital (WACC)

Firm/project maintain same debt

level over time, firm/project have

similar risk profiles, capital cost

reflects the marginal cost of capital

Firm market value of debt and

equity, historic returns on equity,

marginal cost of debt and applicable

tax rate

Survey active investors and or

valuers

Honest responses, rate estimated

independently, they know the

market

Discount rates – real/nominal,

before/after tax, benchmark risk

free rate

Derive from comparable forest

transactions

Buyers seek to maximise profits,

winning bid represents market,

required data are available

Forest prices, sale characteristics

(debt, species, area, volumes),

assumptions regarding growth

prices and costs

26

National Council Real Estate Investment Fiduciaries (NCREIF)

Timberlands Index quantifies returns of US Timberlands

NCREIF Index

� Decomposition into EBITDA returns and Capital

Appreciation

� Steady, but decreasing income return, while capital

appreciation is more volatile and experienced

depreciation in 2001/2002 and 2009 – 2011

Limitation with NCREIF Index

� The number of contributing TIMO’s has historically

been limited and currently the index has eleven

contributing members

� The Index series only dates back to 1987, which is a

relatively short period. Less concern over time as

more years are added

� The index covers only timberland investments in

the United States

Over period, Annual Returns vary within and between

different regions

� North East – 6.7%

� U.S. South – 9.6%

� Pacific North West – 17.8%

-20

-10

0

10

20

30

40

Re

turn

%

NCRIEF EBITDA and Appreciation Returns 1987 - 2015

EBITDA Appreciation

-20

-10

0

10

20

30

40

50

60

70

80

Re

turn

%

NCRIEF Regional Timber Returns 1987 - 2015

South West NE

27

Timberlands yield compare favorably with government bonds

� EBITDA returns of

Timberlands have moved in

tandem (declined) with 10

year Government Bond

returns

� Total Returns have also

declined, but are much more

variable given the impact of

capital (land) appreciation

-10

-5

0

5

10

15

20

25

30

35

40

Re

tirm

%

Inflation Adjusted Annual Yields

Real NCRIEF EBITDA Returns Real NCRIEF Total Returns

Real 10 Year Government Bond Returns

28

Sewall 2015 US Timberlands survey of 11 respondents found similar results to MBG

PNW Inland West South Northeast Lake States Appalachia USA

Mean 5.00% 5.54% 5.00% 5.25% 5.13% 5.71 5.25%

Medium 5.00% 6.00% 5.00% 5.38% 5.38% 6.00% 5.50%

Low 3.25% 3.50% 3.50% 3.50% 3.50% 3.50% 3.50%

High 6.25% 6.50% 6.00% 6.25% 6.00% 6.50% 6..00%

� Sewall is a long time (1880) forest consulting company that provides integrated services in

engineering, geospatial, natural resources, and business management consulting to

government and industry

� PNW and South (two of US largest conifer regions) have similar discount rates of 5%

� Other regions have a mixture of Softwood and Hardwood with slightly higher market risk

profiles

29

International Timberland Discount Rates

– As timberland investors move to less developed markets, there is a requisite increase in the hurdle rate to

compensate for the higher risks involved.

– Timberland investment opportunity ideally must meet the following criteria:

• It must have deep, competitive markets for timber and land;

• It must have developed infrastructure like roads, transportation systems and forestry services;

• It must offer legal transparency and exist in a regulatory climate that provides strong enforcement of private property

rights and that offers regulatory latitude to landowners so they can operate their forests to their highest economic

use; and,

• It must exist in an environment that is stable with regard to taxation and repatriation of investment proceeds.

– The more a timberland market falls short of these criteria, the higher the return premium that is required

for investment

Established

4 – 6% Real

Near Established

+200 to 400 bp

Pioneer

+500 to 700 bp

Frontier

800 bp or higher

United States

Canada

New Zealand

Australia

Brazil

Uruguay

Chile

Central America

Central/Eastern Europe

Argentina

Russia

South East Asia

East Africa

30

Risk elements increase the Discount rate for overseas timberlands and vary

over time as experience and transparency increases

Element US South New Zealand Columbia

Phase I

Columbia

Phase II

Base 5% 5% 5% 5%

Country 0% 1.5% 2.5% 2.5%

Market 0.5 – 1.5% 1 – 2% 1.5 – 3.5% 1.5 – 3.5%

Firm/Client 0% 1.5% 1 – 3% 0 - 1%

Estimate 5.5 – 6.5% 6 – 7% 10 – 14% 9 – 12%

– Base hurdle rate required by

the fund or firm

– Country risk to account for

regulatory or political concerns

– Market risk specific to the

wood/forest industry specific

issues in the country/region

– Firm/client risk to account for

client comfort, execution

concerns and “greenfield’

Investments

31

Real Estate Investment Trust (REIT) - Description

� Company that owns and operates income-producing real estate

� Commercial, Residential & Timberlands

� Structure was designed to provide a real estate investment structure similar to the structure mutual funds provide for investment in stocks

� REIT owners usually value the cash flow and depend on a steady flow of income from timber harvests or other sources

� REIT owners have an advantage over forest industry owners because of favorable treatment of timber-related capital gains and pass-through income

� To maintain or increase payouts to shareholders, REIT’s are under pressure to harvest timber on a regular basis (regardless of timber markets) and supplement that income with real estate sales

� Better set up to sell real estate in multiple sales than are TIMOs which hit regulated limits on the number of sales they can complete in a year

32

REIT Structure

� Ownership Restrictions

� No fewer than 100 shareholders

� No more than 50% of the REIT may be owned by 5 or fewer shareholders

� Quarterly Asset Tests

� 75% of the FMV of its assets must consist of real estate (including timberlands)

� Taxable REIT subsidiary can hold non-qualifying assets but may not exceed 20% of the total value of REIT assets

� Income Tests

� 75% of REIT income must come from rents from real property and gains rom the disposition of real property (including sale of timber on a pay-as-cut basis)

� 95% of REIT income must consist of above plus other passive income such as interest, dividends, taxable REIT sub etc.

� Distribution Requirements

� REIT’s are required to distribute 90% of taxable income. Undistributed income is taxed at corporate rates

� Shareholder Taxation

� Shareholders are taxed on the distribution from the REIT

� Ordinary income at shareholders’s ordinary tax rate

� Capital Gain Income at shareholders capital gain rate (usually 15%)

� Income attributable to distribution from a TRS at special 15% tax rate

33

REIT - Tax Advantage (pure Timber)

Corporate Ownership REIT Ownerhsip

Timber Earnings Before Tax 100.00 100.0

Corporate Taxes at 35% -35.00

Timber Earnings After Tax 65.00 100.0

Pension Fund High Income

Individual

Pension Fund High Income

Individual

100 Payout of Earnings 65.00 65.00 100.00 100.00

-9.75 -15.00

65.00 55.25 100.00 85.00

Improvement 35 29.75

34

US Timber REITs -Ownership

MM acres Weyerhaeuser Rayonier Potlatch

US Pacific North West 3 0.37 0.45

US South 7.3 1.9 0.36

US North East 1.8 0.17

Uruguay 0.32

New Zealand 0.44

Total Owned 12.42 2.71 0.98

Canada (leased) 13.9

35

Timber Investment Management Organization (TIMO) - Description

� TIMO is a management group that aids institutional investors in managing their timberland investments

� TIMO acts as a broker for institutional clients

� Primary responsibility of TIMOs are to find, analyze and acquire investment properties that would best suit their clients .

� TIMO is usually given responsibility of actively managing the timberland to achieve adequate returns for the investors

� Privately held partnerships and other entities, managed by TIMOs, own the majority of the land and equity

� Hold Timberlands for a set period (7 – 15 years) and derive 1/3rd of returns from operations (Timber sales) and 2/3rd from asset appreciation (land appreciation and timber growth)

� Land appreciation and timber gains are free from double taxation, owners are economically indifferent to harvest income versus returns from real estate values

� Emphasize market timing and economically optimized harvest schedules over cash-flow considerations

36

TIMO Structure

Timberland

Holding

Vehicle

Investors- Institutions

- Private

Forest Management- Internal / vertically integrated

- External consultants &

contractors

Structured as:

- Fund- Closed ended company

- Mutual fund (open ended)

- Listed

- Un listed

- Separate Account

Services e.g.:

- Silvicultural activities

- Investment advices

- DD

- Etc...

Management fees:

- Fixed

- Performance

Facilitator:

TIMO

37

TIMO Ownership

Public Pension

Funds

49%

Corporate

Pension Funds

9%

Foundation &

Endowments

11%

High Net Worth

9%

Fund of Funds

2%

Other

20%

TIMO Investors

$ 45 million

Fund

58%

Separate

Account

42%

Fund vs Separate Account

� 60% of TIMO ownership lands are

by Pension Funds

� 50% Public

� 10% Private

� 60% of TIMO lands are held in

“comingled” funds

� 40% are held in Separate Accounts

where the investor owns a direct

piece of property

38

TIMO Type of Funds

� Open-end funds

� No (or long term) defined closing day of the fund

� Regulated how to enter and exit the investment engagement

� Possible to enter during investment period

� Possible to raise capital during the life time

� Open-end mutual funds must be willing to buy back their shares from their investors at the end of every business day at the

net asset value computed that day. Most open-end funds also sell shares to the public every business day; these shares are

also priced at net asset value. The total investment in the fund will vary based on share purchases, share redemptions and

fluctuation in market valuation. There is no legal limit on the number of shares that can be issued.

� Closed-end funds

� Defined end closing time of the fund

� Not possible to enter the fund during the investment period (if no-one is exiting)

� Not regulated how to exit during the investment period (if even possible)

� Not possible to raise capital during the life time of the fund

� Closed-end funds generally issue shares to the public only once, when they are created through an initial public listing. Their

shares are then listed for trading on a stock exchange. Investors who no longer wish to invest in the fund cannot sell their

shares back to the fund (as they can with an open-end fund). Instead, they must sell their shares to another investor in the

market; the price they receive may be significantly different from net asset value

39

Major US TIMOs

Acres US International Total Focus

Hancock Timber Resource Group 3,333,000 2,280,000 5,613,000 Balanced Region Softwoods

Forestland Group 3,243,000 248,000 3,491,000 Hardwoods

Campbell Group 2,470,000 230,000 2,700,000 US, Australia

Wagner Forest Management

1,355,000

1,345,000 2,700,000

US NorthEast & Canada - Conservation

Forest Investment Associates 2,245,600 137,673 2,383,273 Brazil

Global Forest Partners 442,000 1,411,000 1,853,000 Balanced Global

Molpus 1,650,000 1,650,000 US

GMO Renewable Resources 956,122 530,311 1,486,433 US, Chile, Uruguay, Australia, New Zealand, Latin

America

40

Single Acre Modeling is basis for Timberland Valuations

Mill Realization

Product / Timber Price

Supply

Wood

Products

Demand

Single Acre

� Begins with bare ground

� Displays costs and returns over a rotation

� Primarily a timber model

� Enables comparisons between regimes / countries

41

Single Acre – U.S. Douglas-fir Long Term Price

• Raw material prices are linked to long-term market values for lumber

42

Single Acre – U.S. Douglas-fir exceeds cost of capital

Western Timberlands - Life Cycle of One Acre for DF Domestic

Including Mineral and Misc Revenue

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37

2007$/Acre

Accumulated Cost of Money @ 6%

Land Cost and After-tax Stand Investment

After-tax Return-to-Acre

Plant

FertilizeAges 15, 23, 31 Clear-cut

Harvest Age 37

Buy Land

Sell Land

Build Roads

Real Profit =

IRR =

Discount Rate =

NPV =

$2,046

6%

7.0%

$224

43

Single Acre – U.S. Loblolly

Southern Timberlands - Life Cycle of One Acre

Includes Minerals & Misc Revenue

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

2007$/Acre

Accumulated Cost of Money @ Discount Rate



Plant

PruneAge 9

FertilizeAges 7, 13, 17, 21 Commercially

ThinAges 9 & 18

Clear-cutHarvestAge 25

Buy Land

Sell Land

Real Profit =

IRR =

Discount Rate =

NPV =

$1,065

6%

8.2%

$293

44

Single Acre – South America Loblolly

• Risk premium of 4% above U.S. timberlands cost of capital is used

Uruguay Timberlands - Life Cycle of One AcrePrices from 2003 Phased Exit Agreement Analysis

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21




Plant

PruneAge 3, 4, 6, 9, 10

CommerciallyThin

Ages 12 & 17


Real Profit =

Discount Rate =

IRR =

NPV =

Buy Land

Sell Land

$555

10.6%

10%

$70

45

Single Acre – South America Eucalyptus

� Eucalyptus has the potential for

attractive rates of return

Uruguay Timberlands - Life Cycle of One Acre

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

2007$/acre




Plant

PruneAge 2, 3, 4, 5, 6

CommerciallyThinAge 9


Real Profit =

IRR =

Discount Rate =

NPV =

Buy Land

Sell Land

$300 11%

10% $60

46

Total Property valuation is the sum of Single Acre

Mill Realization


Supply

Wood

Products

Demand

Total Property

• Current asset base → inventory and harvest paQern

• Buy and hold strategy

• Measured by cash flow pattern, operating value and

return to market

47

Total Property valuations are a function of Revenues and Net Cash Flows

Southern Timberlands Financial Projection

0

200

400

600

800

1000

1200

1400

2007 2011 2015 2019 2023 2027

2007$ (M

illions)

Harvest & HandlingCosts

Forestry & AdminCosts, Misc.

Taxes

Capital

Net Cash Flow

Series7

Revenue from

Operations and

LAP Sales

Acres

(million)

4.14

48

Total System Evaluates a Portfolio of Timberland Investments

Cash Flow Pattern

AC

B

Re

turn

Risk

Base

Alt #1

Alt #2

Return / Risk

Returns to Acre / Hectare

Alt #2 Alt #1 Base

IRR

West South Int’l

IRR

Do

lla

rs

Mill Realization


Mill Realization


SupplySupply

Wood

Products

Demand

Competitive

Environment

Tax

Efficiencies

Non-Timber• Real estate

• Oil, gas, minerals

• Bioenergy

• Recreation

Land

Prices

Operational /

Country Risk

Total SystemTotal System

� Addresses complex strategy options

� Allows evaluation of alternative business models

� Flexibility to buy and sell revenue streams

� Multiple return / risk profiles

Total SystemTotal System

required to evaluate

North American /

International options

Time

Return to Market

Acres

Re

turn

to

Ma

rke

t

Cost of Capital

49

Non-Timber Income and Land Values are contributing to valuations

• “New” owners have

adopted business models

focused on value beyond

sustained timber

harvesting cash flows –

both in the U.S. and

internationally

• Additional factors

contribute to pricing of

timberland

• Menasha: 5.5-6.5% real

pretax

• IP / TimberStar: 5.5-6.5%

real pretax

Timberland Pricing

Timber

Revenues

Non-timber

Revenues

HBU

Potential

Wholesale

/ Retail

Value

Arbitrage

Aggressive

Outlook

for Risk

Factors

Oil, gas, minerals

Hunting leases

Conservation

easements, etc.

Real

estate

Short to

mid-term

buy and

spin

Timber price

appreciation

Land price

appreciation

Discount rate

Increasing Risk

Increasing Value

50

Country Risk needs to be separated from Operational Risk

• Comparison of risk profiles for countries of interest

– operating risks

– profit repatriation

– currency

– taxation

– labor market

51

Key messages on Private Timberland Investments

• Globally, Timberlands are being viewed as Financial Investments

• US Timberland ownership structure driven by tax laws– REIT

– TIMO

• Discount rate key variable in determining “profitability” of Timberland Holdings

• Single acre modeling builds to “Total Property” and “System Portfolio” for Valuation, Returns and Risk

• Non-timber values are becoming increasingly important in Timberland valuations and transactions

52

UBC Forestry 465 Lecturewood465-kozak.sites.olt.ubc.ca/files/2013/01/465... · Global Hardwood...

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