Forest Business Risks and Opportunities Mike Clutter – V.P. North American Operations and Investments
www.forestinvest.com
Forest Insight Conference Organizers Thanks
• Thanks to Wayne Bell, Phil and Derek Dougherty, and all of the folks who have helped organize the conference. It is an honor to be here today and speak. • Hopefully this will be a discussion and not a lecture. I spent about 16 years of my career teaching undergraduates and MBA students corporate finance and found the we all learn better in a discussion format. So please ask questions as we go. • Equal amounts of time in my professional career between the private sector (Union Camp Corporation, Georgia-Pacific, and Forest Investment Associates) and academia (The University of Georgia). I can’t seem to hold a job • Generally focus on issues / challenges that cross the disciplines of biometrics and finance • Forest valuation • Uncertainty / Risk • Have generally focused on those areas that contribute to understanding the value of forests and the uncertainty associated with those estimates 2
Forest Investment Associates Introduction
From the firm’s inception in 1986, FIA’s founders were instrumental in institutional timberland management.
$5.7 billion in timberland assets under management • 2.7 million acres of timberland in 19 U.S. states, Brazil & Chile • 21 separate account relationships, 72% of AUM • 5 commingled funds, 28% of AUM Independent: broad employee ownership within our 57 employees (49 of which are shareholders and 26 of which are foresters)
Versatile structure allows for evaluation, acquisition, and management of properties across U.S. industrial regions and global markets Thirty years of experience in complex transactions, joint ventures, supply agreements, and financing structures
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Forest Investment Associates’ Client Portfolio 2,687,914 Acres Under Management
Location AL AR CA FL GA LA ME MS NC NH NY OR PA SC TX VA WA WI WV Brazil Chile Grand Total
Acres 115,447 240,796 33,618 203,633 291,652 12,596 61,924 196,929 220,567 707 8,278 134,629 126,731 215,998 235,410 170,373 105,288 63,347 21,169 165,315 63,505 2,687,914
The areas highlighted represent counties / countries in which FIA’s existing clients own timberland. As of March 31st, 2017
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Business Risk
What might that be? Investopedia defines business risk as: • Business risk is the possibility a company will have lower than anticipated profits or experience a loss rather than taking a profit. Business risk is influenced by numerous factors, including sales volume, per-unit price, input costs, competition, the overall economic climate and government regulations. • The early work in quantifying financial risk revolved around “downside risk” . . . The possibility of a loss. • Later work focused on the variability of cash flows and returns. This ultimately led to the development of modern portfolio theory and the concept of diversification in financial portfolios.
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Returns from Timberland
What are the factors that impact timberland returns Timberland returns have been segmented into a few factors: • Biological growth explains about two thirds of the return generated from a timberland investment • About 20% of the return can be attributed to change in timber prices • About 15% of the return is related to changes in the underlying timberland price Timberland returns have some interesting attributes • • • •
Low risk and commensurate returns Uncorrelated with most other asset classes Positively correlated with inflation Great asset to add to a financial portfolio for diversification
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Business Risk in Forestry What might that be?
I conducted a completely non-scientific survey . . . I asked some foresters and some timberland investors what their top five business risk factors might be. I then “averaged” the lists and came up with: 5. 4. 3. 2. 1.
Foresters Forest Health Logging Capacity Regulatory / Environmental Risk Manufacturing Sector Health and Productivity Timber Price Risk
Investors Operational Execution Liquidity Risk Timber Price Risk Forest Health Hurricane and Fire Risk
• Foresters appear more concerned about markets and those factors that impact market health and behavior • Investors appear more concerned about things that they hear about on the news – forest fires and forest health issues
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My Personal Opinion on Business Risk in Forestry These factors can be segmented into a few important groups • Timber market risks – Driven by underlying supply and demand for timber products • Been a challenge since the GFC of 2007 - 08 • Pine CNS and sawtimber prices have seen unprecedented declines • In general, pine pulpwood has faired better • Woodbaskets across the south exhibit different trends based upon the forests and the mills • Regulatory / Tax / Environmental Risks • Recent perception is that these issues have subsided to some degree • Less regulatory pressure from EPA and state regulatory agencies • Always a longer-term lingering concern about private property rights and the ability to effectively manage private land • Tax . . . Who knows at this point. However, rarely does forestry influence tax policy. 8
My Personal Opinion on Business Risk in Forestry These can be segmented into a few important groups • Operational Risks • Logging Capacity • Tree Planting Capacity and Migrant Worker challenges • BMPs and operational restrictions • Other Contractor Capacity (site prep, fertilization, etc.)
• Biological / Natural Risks • Forest Health risks – bugs, diseases, etc. • Weather Risks • Fire Risks
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Some Important Trends Market Update - End-Use Markets
Lumber Production
2.5
90
2.0
75
Billion Board Feet (BBF)
1.5
1.0
0.5
0.0
Total North American Production
60 45
Canada 30
U.S South 15
U.S. West
0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Source: Forest Economic Advisors
Source: Forest Economic Advisors
Lumber & Panel Prices
Lumber Production vs Sawtimber
$525
20 19
$475
Structural Panel Composite Price
$425
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Billion Board Feet (BBF)
Composite Price Indices
$50
$375
$325 $275
Framing Lumber Composite Price
$225
$45
U.S. South Annualized Lumber Production
17
$40
16 15
$35
14
U.S. South Pine Sawtimber Stumpage
13
$30
12
$25
11
$175 2005
2006
2007
2008
Source: Random LengthsÂŽ
2009
2010
2011
2012
2013
2014
2015
2016
2017 YTD
10 1Q1993
$20
1Q1996
1Q1999
1Q2002
1Q2005
1Q2008
1Q2011
1Q2014
1Q2017
Source: Forest Economic Advisors & Timber Mart-South
Confidential | 10
PST Stumpage Prices ($/ton)
000's in thousands (SAAR)
Housing Starts
Market Trends
Market Update - Timber Prices Northeastern Hardwood Timber Prices
Southern Timber Prices $900 $800
$35
$700 Pine Sawtimber
$30 $25
Chip-n-Saw
$20 $15
Pine Pulpwood
$3,000 N. Red Oak
$2,500 Hard Maple
$600 $500
$300 $200
$5
$100
$1,500
Soft Maple
$400
$10
$2,000
White Ash
$1,000
Black Cherry
$500
$-
$2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Source: Forest2Market®
2017 YTD
$2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: Pennsylvania Woodlands Timber Market Report
2015
2016
2017 YTD
Pacific Northwest Timber Prices
•
$800 Douglas-fir, Sawmill #2
Delivered ($/MBF)
$700
•
$600 $500 Whitewoods Sawlogs
$400
•
$300 $200
•
$100 $2006
2007
2008
Source: RISI Log Lines
2009
2010
2011
2012
2013
2014
2015
2016
South - Recovery in southern sawtimber markets will be protracted South - Continued strong demand for pine pulpwood will be supported by higher demand from expanding OSB market North – Strong demand for specific species will continue, however black cherry demand remains stagnant PNW – Sawlog prices expected to strengthen as domestic demand increases
2017 YTD
Confidential | 11
Black Cherry - Stumpage ($/MBF)
$40
Stumpage ($/MBF)
Stumpage ($/ton)
$45
How to Mitigate Business Risks The Important Part
• How do we approach mitigating these various business risks • Build timberland portfolios that have as much geographic and age class diversification as possible • Do everything possible to enhance the health of timber markets • Maintain relationships with multiple timber purchasers
• Maintain well stocked, healthy stands of trees . . . Active management of your forests • Support organizations that lobby for friendly timber regulation
• Understand the importance of biological growth on returns
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Questions Thanks.
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