A SYNTHETIC APPROACH
TO BENCHMARKING
TIMBERLAND RETURNS
Samuel J. Radcliffe
Timberland Investing World Summit
November 13 - 15, 2006
Digital Sandbox Network Event Center
New York, NY
Overview
Why benchmark?
 Review of existing benchmarks
 A rationale for synthetic benchmarks
 Preliminary explorations
 Potential usefulness

2
Why benchmark?
Compare returns to “best in class”
 Assess technology
 Gauge management effectiveness
 Evaluate investment profile of asset
class (“do we want to get into timber?”)
 Basis for compensation, incentives

3
Types of Benchmarks

Actual Property Performance
– Timberland Property Index
(NCREIF 1987 - Ongoing)
– Timberland Performance Index
(Caulfield 1981 - 1999)

Synthetic (model or proxy-based)
– John Hancock Timber Index
(1960 - Ongoing)
– Various discrete research studies
4
Issues with Performance
Benchmarks
NCREIF includes both appraised
values and actual transaction prices
 Sample size (<$9 billion?, <10
managers?)
 Characteristics of sample properties
unknown

5
Issues with Synthetic
Benchmarks
Aura of “ivory tower” = investor
skepticism
 Difficult modeling issues re valuation of
land and premerchantable
 In a sense, is an appraisal approach,
suffers from same drawbacks as
performance benchmark

6
WARNING: These Ideas Are
Under Construction...
7
Today’s Market: Get a Grip!




Historically, timber production economics
attracted investors and drove property prices
Today property prices increasingly out of line
with timber production fundamentals
Supply/demand for the asset class the driving
force, as opposed to supply/demand for timber
At some point, demand for asset class has to be
rationalized with timber production economics
8
In Other Words
Can the prices being paid for
timberland be supported by the timber
production potential of the property (i.e.
not by HBU or exit value)?
9
Questions to be Answered by
“Timber Production Index”
What is the “normal” ROI associated
with a property managed solely for
timber production?
 What are the sources of that return?
 What property value is associated with
targeted ROI’s?

10
Fundamental Value Premise
Today’s value derives from
anticipation of future cash
flows.
11
Sources of Timberland Returns
+Timber Sale Revenues
+ Other Revenues
+ Land Sale Revenues
- Land Management/Ownership Costs
+ Terminal Value of Remaining Land Base
= Net Present Value of Timberlands
12
Model Property / Investment
“Regulated forest”
 10% non-productive land
 10-year holding period
 Pure timber production model
 No real price or cost inflation

13
Simple Southern Pine
Plantation Model
Year
Chemical Site Prep
Mechanical Site Prep
Planting
Weed Control
Fertilization
Thin
Fertilization
Clearcut
Annual Costs
0
0
0
1
5
15
16
26
0-26
Cost
Yield
Price
($/acre)
(tons) ($/ton)
($85)
($125)
($55)
($40)
($70)
$0
40
$5.89
($105)
$0
100 $32.00
($15)
14
Forward-looking calculation of
IRR requires some initial
property value
NCREIF value
 NCREIF as adjusted by HTRG

(Aronow, Binkley & Washburn, 2004)

Multiple of timber capital value
15
IRR on NCREIF Market Value
30%
25%
20%
Annual ROI
15%
10%
5%
0%
-5%
-10%
1988
1990
1992
NCREIF
1994
1996
1998
Hancock Timber Index
2000
2002
2004
2006
Timber Production Potential
16
IRR on Timber Capital Value
30%
25%
20%
Annual ROI
15%
10%
5%
0%
-5%
-10%
1988
1990
1992
NCREIF
1994
1996
1998
Hancock Timber Index
2000
2002
2004
2006
Timber Production Potential
17
$2,500
$ Per Acre
$2,000
$1,500
$1,000
$500
$0
1988
1990
1992
1994
NCREIF
1996
1998
2000
2002
2004
2006
2008
6% Targeted Return
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Decomposition of Returns
1991
1993
1995
1997
1999
2001
2003
Property
Price
($/acre)
$600
$675
$800
$910
$1,110
$1,010
$1,250
IRR
6.7%
11.0%
12.1%
13.0%
10.1%
8.8%
8.2%
Timber
Sales
$500
$614
$714
$805
$869
$771
$880
Capital Operating
Costs
Costs
($119)
($96)
($98)
($80)
($94)
($76)
($90)
($73)
($102)
($83)
($107)
($87)
($111)
($90)
Holding
Period Terminal
Value
Value
$315
$285
$238
$437
$256
$544
$268
$642
$426
$684
$434
$576
$570
$680
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Holding Period Value
20
20
20
20
20
20
20
19
19
19
19
19
19
19
19
19
19
06
05
04
03
02
01
00
99
98
97
96
95
94
93
92
91
90
$ Per Acre
$1,200
$1,000
$800
$600
$400
$200
$0
Terminal Value
20
Profile of Benchmark “Product”
Family of model forest portfolios (forest
types, age distributions, geographic
regions)
 Detailed production/economic models
(prices, capital and operating costs)
 Forward-looking, but with historical
“projections”

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What would this really give us?
Specific coverage of important forest
types (e.g. southern hardwoods)
 Sub-regional level
 Transparency and repeatability

22
Uses for Current Investors
Are we in a reasonable ROI range?
 Should we be buying or selling?
 What attributes of our investment (do or
don’t) justify our position relative to the
benchmarks?

23
Uses for Potential New
Investors
What range of returns can we expect
from this asset class?
 How do timber investments generate
returns, historically and prospectively?
 Where are the best (worst) places to
invest?

24
Uses for Appraisers and
TIMO’s
Valuation metrics for standardized
property types could be developed by
appraisers and flow through to NCREIF
 Decomposing value provides appraisal
client with more explanation and
justification (and provide appraiser with
useful self-check)

25
Need for Industry-wide
Participation
Identification of model forest types
 Model parameters
 Conceptual and technical issues
 Funding!

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Contact:
Samuel J. Radcliffe
Vice President
Prentiss & Carlisle
8301 North Allen Lane
Milwaukee, WI 53217
Voice:
E-Mail:
Website:
414.351.5202 Fax: 414.351.5206
sjradcliffe@prentissandcarlisle.com
www.prentissandcarlisle.com
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