Understanding Risk in Global Timberland Investing
Presented at:
S E C O N D AN N U AL
Forest Products and Timberland Investment
Conference
March 31-April 1, 2015 | New York, NY USA
Bret Vicary, PhD, MAI
Vice President
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 markets
Pulpwood, 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
Physical
Roads – 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
Legal
Strong 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
Lack diversity – score fairly well otherwise:
Tier 1 – Australia/NZ, Chile, Canada
Australia/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, Uruguay
Limited diversity (Euc, Pine, Teak plantations)
Scale with world-class mills
Instability poses challenges for foreign owners
Native rainforest concessions are another matter
“Emergent” Timberland Markets
Diversity & scale can be challenging:
Tier 1 – Panama, Eastern Europe
Panama – 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 America
Costa Rica, Nicaragua, Guatemala
Teak driven
Scale challenging
Corruption & transparency issues
Native timber not attractive
“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
3
4
10
11
16
17
19
24
34
41
NZ
USA
U.K.
Australia
China
Lithuania
Canada
Latvia
Chile
S Africa
Corruption
Perceptions
Index
1
19
14
9
80
43
9
53
22
72
New Zealand – radiata pine
Exports add diversity, hedge currency
Predictable yields
and good scale … but basically
a 1-species show
Romania – native hardwood
Progress with regulations,
enforcement, business
models … & a few opportunities
for scale
High-quality hardwood,
species & market diversity
Latin America – super trees
Euc. in Brazil - how old?
Teak in
Panama …
Verifying age
& yield
Tasmania – native hardwood
Unstable gov’t leadership,
intense social pressures…
Non-investible climate by
some accounts (Sewall Survey)
Volatile market situation –
Uncertain future for mills &
resource base
USA – Timber & Forestland Markets
Maine timber & HBU
Pacific
NW
young
forest
Vermont
Sugarbush
Georgia
pine straw
Due Diligence & Valuation Challenges
Evaluating risk
Inventory & 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.
SEWALL – since 1880
BRET P. VICARY, PH.D., MAI
Vice President, Forestry & Natural Resources
+1.207.827.4456 | m +1.207.745.1926
bret@jws.com
End
Forestry Consulting offices:
Old Town, ME
Thetford, VT
Charleston, SC
International Falls, MN
Biosketch
Bret P. Vicary, Ph.D., MAI, LPF | Vice President Forestry & Natural Resource Consulting
James W. Sewall Company – Old Town, ME | USA
off +1 207.817.5447| mob +1 207.745.1926 | bret@jws.com | 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