Bret Vicary, PhD, MAI Vice President
Understanding Risk in Global Timberland Investing
Presented at:
SECOND ANNU AL
Forest Products and Timberland Investment Conference March 31-April 1, 2015 | New York, NY USA
US Timberlands – The Benchmark
US funds major source globally
Very diverse timber markets
Extremely diverse forestland markets
Low risk low required return
Investors seeking higher risk-adjusted returns have sought offshore diversity.
US Timberlands – Great Diversity
Timber marketsPulpwood, CNS, sawtimber, veneer, poles, biomass
Pine straw, maple products, tipping leases
Great inter-regional diversity – species, planted vs. natural …
Forestland markets – multiple uses
Timber production
Recreation – leases, sales
Kingdom buyers – timber, recreation
Wetland mitigation banking / Carbon
HBU values- small tracts, aesthetics, second homes
Conservation buyers – freehold, easements
Mineral interests
US Timberlands – Infrastructure
PhysicalRoads – Rail – Ports
Quality logging & trucking force
Large Scale
Cost effective, little or no management dilution
Investment
TIMOs – Timber REITS – Private equities – Pooled vs. Direct
Legal, consulting, financial services
US Timberlands – Legal / Security
LegalStrong property rights
Verifiable property title
Transparent legal & court systems
Political / Corruption risks low
Stable currency
Income tax – zero for domestic TIMOs
Not so favorable for taxable entities
Other “Mature” Timberland Markets
Tier 1 – Australia/NZ, Chile, CanadaAustralia/NZ – pine/euc, safe, spotty exports offer currency hedging. Tasmania diverse but much more risky.
NZ – mostly radiata pine, safe, hedge currency w/exports
Canada – diverse native forests, mills spotty, exports solid
Tier 2 – Brazil, UruguayLimited diversity (Euc, Pine, Teak plantations)
Scale with world-class mills
Instability poses challenges for foreign owners
Native rainforest concessions are another matter
Lack diversity – score fairly well otherwise:
“Emergent” Timberland Markets
Tier 1 – Panama, Eastern EuropePanama – entirely export-driven (teak), dollarized economy, friendly to foreigners, scale/road infrastructure challenges
E Europe – diverse forests & markets, variable exposure to corruption but strides being made, attractive to W Europ. Funds (familiarity lowers perceived risks)
Tier 2 – Central AmericaCosta Rica, Nicaragua, Guatemala
Teak driven
Scale challenging
Corruption & transparency issues
Native timber not attractive
Diversity & scale can be challenging:
“Frontier” Timberland Markets
Africa, SE Asia, China, Native Tbr. Concessions – challenges:
Market depth / Econ. Stability
Infrastructure – Physical, Legal
Scale / Mgt Dilution
Mgt & Accounting Controls
Corruption / Property rights
Access to professional services
Currency risk
Liquidity on exit
Sewall 2014 Investor Survey
19 “Active investor respondents
TIMOs, Pensions, Endowments, REITs
US base discount rate for US assets
Down 25 bpts to 5.5% real, pre-tax, pre-TIMO fees
Capital more available – est. USD 4-5 billion
Sustained housing recovery – 1.5M starts by 2017
Cautious optimism
Marked increase in 2014 global sales
Carbon markets remain ephemeral
Return to 1.5M housing starts in 2017?
Sewall Investor Survey - 2013
World Bank Ease of Doing Business
Corruption Perceptions
Index3 NZ 14 USA 1910 U.K. 1411 Australia 916 China 8017 Lithuania 4319 Canada 924 Latvia 5334 Chile 2241 S Africa 72
New Zealand – radiata pine
Exports add diversity, hedge currency
Predictable yieldsand good scale … but basically
a 1-species show
Romania – native hardwood
High-quality hardwood, species & market diversity
Progress with regulations,enforcement, business
models … & a few opportunitiesfor scale
Latin America – super treesEuc. in Brazil - how old?
Teak in Panama …
Verifying age& yield
Tasmania – native hardwood
Unstable gov’t leadership,intense social pressures…
Non-investible climate bysome accounts (Sewall Survey)
Volatile market situation – Uncertain future for mills &
resource base
USA – Timber & Forestland Markets
VermontSugar-bush
Georgia pine straw
Maine timber & HBU
PacificNW
youngforest
Due Diligence & Valuation Challenges
Evaluating riskInventory & GIS
Timber yields | Markets | Legal-Political
Losses from: Pests | Disease | Fire | Weather
Potential for Scale | Exit options
Who else will bid?
Comparable transactions analysis – Market Value vs. Investment Value
IFRS – Round peg in square hole CHAOS!
Violates Principle of Consistent Use Ponzi schemes?
Technology & precision may not enhance returns.
Challenge creates opportunity.
End
SEWALL – since 1880BRET P. VICARY, PH.D., MAI
Vice President, Forestry & Natural Resources+1.207.827.4456 | m +1.207.745.1926
Forestry Consulting offices:Old Town, METhetford, VTCharleston, SCInternational Falls, MN
Biosketch
Bret P. Vicary, Ph.D., MAI, LPF | Vice President Forestry & Natural Resource ConsultingJames W. Sewall Company – Old Town, ME | USAoff +1 207.817.5447| mob +1 207.745.1926 | [email protected] | www.sewall.com
Dr. Vicary provides forestland investors with valuation and due diligence services throughout the Continental U.S., Hawaii, Canada, Europe, Latin America, Africa, Australia, and New Zealand. Clients include timber investment management organizations (TIMOs), REITs, pension funds, forest industry, private equities, family investors, lenders, attorneys, public agencies, and conservation groups.
An author and frequent speaker, Bret specializes in timberland investment analysis & appraisal, conservation easements and timber tax litigation. He holds the Appraisal Institute’s MAI designation, is a Faculty Associate at the University of Maine where he earned his PhD in Forest Economics, and is the principal author of the NCREIF Timberland Committee’s “Best Appraisal Practices.”
Sewall’s Forestry & Natural Resource Consulting group, with offices in Maine, Vermont, South Carolina, & Minnesota, is the oldest in North America, dating back to 1880. It provides valuations and due diligence for some $20 billion in forest assets worldwide each year.
Sewall forestry services: appraisal & investment analysis | investment counseling | forest inventory | growth & yield modeling | harvest scheduling | forest management | economic analysis | resource studies | training | litigation support | GIS & mapping | photogrammetry