The Changing Landscape of
Private Timberland Ownership
Mike Clutter - UGA
David Newman – UGA
Brooks Mendell – UGA
David Wear and John Greis – USDA-FS
Background



Following the Southern Forest Resource
Assessment, a perception that things had
changed with respect to timberland
Southern Group of State Foresters arranged
through Dave Wear and John Greis to fund
this study
Brought together an advisory group of
interested parties including Forest Industry,
TIMOs, environmental groups and others to
lay out the scope of the question
Commercial Timberland Transactions


Over 22 million acres of industrial timberland has
changed ownership in the past five years (in large
transactions)
The traditional vertically integrated forest products
companies have been the sellers and institutional
investors have been the purchasers


Trends are evident by region (NE, South, Lake States, PNW)
Trends appear to be continuing with additional asset
sales by integrated forest products companies. If any
are left ??
Acres of Timberland Sales by State
and Survey Unit (1996 through 2004)
FIA Unit
State
Total
1
Alabama
2,583,175
13,344
443,811
621,445
775,375
607,000
122,200
Arkansas
1,633,695
146,879
12,700
1,314,096
124,020
36,000
-
Florida
1,935,270
1,378,930
542,340
14,000
-
Georgia
2,326,875
952,357
337,985
806,316
205,817
24,400
-
Louisiana
3,634,969
894,023
307,441
875,257
113,732
1,444,516
-
Mississippi
1,782,410
1,785
387,137
588,120
350,070
455,298
-
North Carolina
341,483
133,243
13,746
135,879
58,615
Oklahoma
355,594
321,594
34,000
South Carolina
1,074,512
241,780
190,131
Tennesse
1,067,954
40,200
90,500
Texas
778,251
328,210
450,041
Virginia
924,852
459,172
241,680
Total
18,439,040
2
3
4
5
-
6
-
-
-
-
-
-
642,601
-
-
-
343,000
447,500
-
70,000
126,000
146,754
28,000
-
Timberland Sales by State and
Survey Unit (1996 through 2004)
Why ?




Performance issues in the forest products industry
 Abysmal shareholder returns. Private placement
returns on timberlands have been far better
 Consolidation among companies in the industry
has left substantial debt on their balance sheets
Recognition that timberland ownership may not be
required to be in the forest products manufacturing
business (a change in strategic thinking)
Deep and mature markets for most raw materials in
most regions of the country
More efficient tax structures for owning timberland
have evolved (not C-corporations)
Strategic Context...
S&P500 Return for same period: 18%
Total Shareholder Return: January 1998 - June 30, 2001
8%
5%
-5%
-7%
-8%
-10%
-10%
-15%
-11%
-12%
-12%
-13%
-18%
-23%
-25%
CHA GP+TGP WY
PCH
W
MEA
WLL
BCC
TIN
IP
LPX
Forest Product industry performance
relative to key benchmarks
2004 returns
Five-year
return
Ten-year
return
Dow Jones
Industrial
+5.3%
+0.7%
+13.1%
S&P 500
+10.9%
-2.3%
+12.1%
Forestry &
Paper Group
+5.1%
-0.9%
+6.2%
Source: Wall Street Journal, 2/28/05
Strategic Context…
Long-term Debt ($MM) by Company
16,000
Champion
12,000
GP
10,000
IP
Mead
8,000
Westvaco
6,000
Temple
4,000
UCC
Weyco
2,000
0
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
Debt ($MM)
14,000
Year
Leading Owners of Timberland in
the U.S. (as of 12/10/2005)
Company
Type
000 acres
1
Plum Creek
T-REIT
8,406
2
International Paper
FP-Company
6,800
3
Weyerhaeuser
FP-Company
6,800
4
Hancock (HTRG)
TIMO
3,315
5
Wagner Forest Mgmt.
TIMO
2,500
6
Forestland Group
TIMO
2,123
7
Forest Capital Partners
TMO
2,100
8
Temple-Inland
FP-Company
2,061
9
Rayonier
T-REIT
2,036
10
Sierra Pacific
Family
1,700
11
Potlatch
FP, T-REIT 2006
1,525
12
Bowater
FP-Company
1,525
13
Global Forest Partners
TIMO
1,400
• Of the top 19 land
owners, only 6 are
forest products
companies, 9 are
TIMOs, 3 are REITs.
•Remember TIMOs
do not own land –
they manage it for
other investors
Impacts on Timberland

There are substantial concerns about the
impact of these timberlands changing
ownership including:




Will this trend increase / accelerate fragmentation
across forested landscapes?
Will management objectives and silvicultural
practices change dramatically?
How will the changes impact fire suppression /
management activities?
Will closed end fixed length funds change the
investment in silviculture?
Methodology


Interview-based methodology utilizing a
common set of questions with a broad range
of timberland investors, firms and
consultants.
Objective:


Determine how these entities manage timberlands
and how they perceive others are managing
timberlands.
Question is “How are pine types managed by
various entities?”
Types of questions related to
timberland ownership

Strategy and objectives


Approach of managing while owning





Operational philosophy & intensity
Community presence
Metrics used to measure performance
Expenditures


For owning & for selling
Research, soil mapping, fire suppression
Transaction-specific questions
Perspectives on, for example, fragmentation
Study group includes 39 interviews
from three industry sectors.

Timberland Investment Management
Organizations (TIMOs)


Forest industry firms



e.g. FIA, RMK, Hancock
e.g. Weyerhaeuser, GP, IP, Temple-Inland
e.g. Plum Creek, Rayonier
Forestry consultants

e.g. F&W, Larson & McGowan, American Forest
Management
Findings highlight the roles of taxes, debt
levels, and shareholder returns.

For most C-corps, timberland ownership does not make
sense.



Timberlands are easily sold relative to manufacturing
assets.



Double-taxation issues.
In many cases timberlands were suboptimized to support mills
Proceeds can be used to reduce debt levels.
Return proceeds to shareholders
Shareholders, analysts, and executives of public firms
believed returns on industry-owned timberlands lagged
alternative investments.

Selling timberlands freed up capital and generated shareholder
value.
Strategy for Owning Timberland

The reasons for owning timberland varied
widely




Integrated forest products companies – raw
materials support for mills, insurance, etc.
Consultants – Depends on the client
TIMOs – Focused on return on investment
Institutional investors, as represented by the
TIMOs were the most consistently focused on
returns
Strategy for Owning Timberland

Maximize financial measures


NPV, ROI
Forest management differs by ownership



Integrated firms more intensive over long-run
TIMOs take both intensive and passive approaches
depending on timeframe
Overall view that a key to success is cost
minimization
Silviculture and Forest Management

A variety of perspectives from the vertically
integrated forest products companies,
TIMOs, and large private landowners





Silviculture practices probably are impacted
More harvest flexibility for TIMOs – maybe
Less long term silviculture investment – maybe
Little investment in activities like soil mapping,
etc.
Fund length appears have an impact on
investment decisions
Research Expenditures

Widely differing views on the role of applied
research and the funding of technology
development




Forest products companies see traditional forestry
research dwindling as they move away from timberland
ownership
TIMOs have a poor record of supporting such activities
Substantial questions about the future of
traditional forestry research
Broad consensus on desire for flexible pricing
with and competition among cooperatives
Fragmentation

In several of our case studies, these divestures
and acquisitions have accelerated fragmentation
in a variety of ways



Case studies
Many have voiced concerns about this increased
fragmentation and its impact on wildlife habitat,
recreation opportunities, future growth rates and
timber supply, etc.
Viewed as a “two-edged sword”.


All recognized the value creation from HBU sales
Mentioned the environmental and resources
management issues as well
Use of Debt in A&D activity


Some of the deals have used debt extensively
and have a higher probability of greatly
increased harvest and minimal silviculture
investment. These deals can be identified.
Generally purchased by entities that do not
have a long-term interest in timber and
timberland investment
Fire Suppression Activities


One question we did pursue was the impact
these trends have had on fire suppression and
fire management activities.
Data collected from the southern States
document substantial losses in resources
dedicated to these activities.


In many states the resources have dropped by over
50%
The new ownership groups have not provided the
same level of resources as the traditional forest
products companies (nor do the remaining forest
products companies at this point)
Capital Gains Taxes

All of the large transactions have involved
some strategy to mitigate or eliminate the
large capital gains taxes due from the sellers
of the timberland


Installment notes
Reverse Morris Trust Transactions
Timberland Ownership Data

We have assembled a database of large
timberland transactions over the past 5 years
to help identify those areas of significant
activity.



Over 600 transactions from 1996 to the present
Majority of the transactions are focused in the
South
Documents that over 80% of the transactions
increase tax efficiency (less taxes paid).
Timber and Timberland Prices

Clearly prices being paid on large transactions
are at all time highs.




$800 to $1500 per acre is not uncommon for land
and timber in the south. Trends apparent from
east to west.
$1500 to $2200 per acre in the PNW.
Maine is at $200 to $400 per acre
Many of these prices are above supportable
Faustmann land rents using a 0% tax rate
and current stumpage prices, standard yields
Predictions



TIMOs (actually their clients) will continue to
gain substantial timberland ownership.
Timberland will continue to be an attractive
asset class for institutional investors
In three years no publicly traded vertically
integrated forest product company will own
more than one million acres of timberland
Questions ??