An MFC Global Investment Management Company Timberland Investor Second Quarter Are Timberland Properties Less Liquid than Commercial Buildings?

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1 Hancock An MFC Global Investment Management Company Timberland Investor Second Quarter 24 Are Timberland Properties Less Liquid than Commercial Buildings? Real estate investment analysts sometimes assert that timberland sales are much less frequent than sales of core commercial properties, and that timberland investments are relatively illiquid as a result. However, an analysis of actual data on property sales from the NCREIF indices shows that timberland and commercial properties have traded at roughly similar rates. Since 10, sales of timberland properties have occurred at an average annual rate of 5.1 percent compared to 7.9 percent for commercial properties. Rates of timberland sales have exceeded rates of commercial property sales during five of the past 12 years. Furthermore, most timberland has been sold via partial sales of subdivided portions of properties. This suggests that the disposition rate for timberland measured in number of transactions has exceeded that for commercial properties. Timberland and Commercial Properties Trade at Similar Rates How does the liquidity of timberland properties compare to commercial buildings? To help answer this question, we thought it would be useful to compare annual rates of timberland and commercial property dispositions property sales during the year expressed as a 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Chart 1: Sales rates for timberland and commercial properties Sales Rate (% per year) Commercial Property Final Sale Timberland Property Final Sale proportion of total property value in the NCREIF indices. Since 10, timberland sales have occurred at an average annual rate Commercial Property Partial Sale Timberland Property Partial Sale Source: NCREIF (for 20, the division of total sales into partial and final categories is estimated) of 5.1 percent, about two-thirds the 7.9 percent average for sales of commercial properties. Rates of sale for both timberland and continued on page 2 Hancock Timber Resource Group High Street, Boston, MA

2 Are Timberland Properties Less Liquid than Commercial Buildings? continued commercial properties have varied substantially from year to year. Timberland property sales were most frequent during the past two years; sales of commercial properties peaked during 19 and 19. The rate of timberland sales exceeded that for commercial buildings during five of the past 12 years. Timberland Properties are Often Sold in Subdivided Ownership Units Timberland properties can often be divided into smaller ownership units. Large timberland properties contain several hundred thousand acres that are often held in hundreds of separate legal parcels. These parcels can be organized into numerous smaller, distinct ownership units. Chart 2: HTRG timberland sale proceeds and premium (%) over appraised value, Sale Proceeds (million $) $8 $7 $6 $5 $4 $3 $2 $1 Source: HTRG 58% Ongoing Operational Sales 18% Portfolio Rebalancing 4% Closed-end Fund Liquidation 10% Investor Cash Requests Past performance is not a guarantee of future results; potential for profit as well as for loss exists. Division of timberland properties can be valuable for investors because it allows them to take advantage of wholesale-to-retail pricing spreads. All else equal, larger timberland properties transact at lower per-acre prices than smaller properties. (See Taking Advantage of the Wholesale Discount for Large Timberland Transactions, HTRG Research Report R--1, for a fuller discussion of the wholesaleto-retail pricing relationship for timberland.) Investors can pool capital to acquire large timberland properties at relatively low wholesale prices, and then divide the properties into smaller ownership units, each of which can be allocated to a different investor. The smaller ownership units are generally created to mimic the character of the larger acquisition. In this manner, a relatively small property say 10,0 acres can be acquired by an investor as part of a 1,0-acre acquisition at a substantially lower per-acre cost than if purchased on a stand-alone basis. Timberland properties can be divided further when they are sold by investors to take advantage of retail pricing premiums. Such partial-property sales have accounted for the majority of timberland property dispositions captured by the NCREIF database. Over the past 14 years, more than two-thirds of the timberland sales in the NCREIF Timberland Property Index have been conducted via partial sales. Many partial sales from timberland properties are part of ongoing operational activities, and are used to capture values created by shifts in the highest-and-best use of timberland parcels from timber production to residence and recreation, or created by demand from conservationists to preserve unique natural areas. Timberland properties are also divided into smaller sales units to implement dispositions motivated by other reasons such as rebalancing regional portfolio allocations, liquidating closed-end funds, and responding to investor needs to downsize their portfolios. This capacity to divide timberland properties into smaller ownership units contrasts with the case for commercial buildings. Although an office tower, for example, may be comprised of many floors, there is little economic advantage in organizing the floors into separate ownership units. Partial sales of commercial properties are uncommon, accounting for less than 5 percent of sales proceeds in the NCREIF Property Index. Timberland Property Sales Boost Investment Performance Property sales have added considerably to total returns received by owners of timberland properties. HTRG generated nearly continued on page 6 2 Hancock Timberland Investor Second Quarter 24

3 Quarterly Average Regional Composite Prices for Softwood Sawtimber Stumpage (US$ per MBF) $1,0 $8 $6 Sources: Log Lines, Timber Mart-South, New Zealand Ministry of Forestry and HTRG analysis U.S. Pacific Northwest Export U.S. Pacific Northwest Domestic U.S. South U.S. Northeast New Zealand Export Figure 1. Softwood Sawtimber Stumpage Prices Softwood sawtimber stumpage prices rose last quarter by about 10 percent in the U.S. Pacific Northwest and U.S. Northeast. In the Pacific Rim region, New Zealand radiata prices fell by about 5 percent in U.S. dollars, and export prices out of the U.S. Pacific Northwest were relatively stable. $4 $2 Quarterly Average Prices for U.S. South Lumber and Sawlogs ($ per MBF - lumber scale) $6 $5 $4 $3 $2 $1 Southern Pine (Westside), Kiln Dried, 2x4 #2, Random Length Lumber Southern Pine Sawlogs Sources: Random Lengths and Timber Mart-South Southern Pine Chip-n-Saw Logs Figure 2. Lumber and Sawlog Prices in the U.S. South Delivered pine sawlog prices in the U.S. South continued to be unresponsive to yet another quarter of strong markets for southern pine lumber. Apparently, pine sawtimber supplies have been sufficiently robust to prevent timber owners from capturing a share of the currently high margins for lumber producers. Quarterly Average Prices for U.S. Pacific Northwest Lumber and Sawlogs ($ per MBF - lumber scale) $5 $4 $3 $2 Figure 3. Lumber and Sawlog Prices in the U.S. Pacific Northwest Lumber prices in the U.S. Pacific Northwest reached decade-long highs last quarter. However, delivered sawlog prices increased by only modest amounts in response. As in the U.S. South, lumber producers have been not been compelled to transfer much of their currently high operating profits to timber owners. $1 Douglas-fir, Green, 2x4 Lumber Hem-fir (Coast), Kiln Dried, 2x4 Lumber Douglas-fir Sawlog Whitewood Sawlog Sources: Random Lengths and Log Lines Hancock Timberland Investor Second Quarter 24 3

4 Quarterly Average Regional Composite Prices for Softwood Pulpwood Stumpage ($ per ton) $40 $35 $30 $25 $20 $15 $10 $5 U.S. Pacific Northwest U.S. Northeast U.S. South Figure 4. Softwood Pulpwood Stumpage Prices Softwood pulpwood stumpage prices fell modestly during the second quarter. Pine pulpwood prices in the U.S. South declined by about 8 percent. $-5 $-10 Sources: Log Lines, Timber Mart-South and HTRG analysis Quarterly Average Prices for Market Pulp ($ per metric ton) and U.S. Pulp Logs ($ per 10 tons) $9 $8 $7 $6 $5 $4 $3 NBSK Market Price Douglas-fir Pulp Logs Figure 5. Market Pulp and U.S. Pulp Log Prices Market pulp prices moved up another $40 per ton during the second quarter. As is the case in solidwood markets, prices for delivered pulp logs in both the South the Pacific Northwest have not increased in response to nearly two years of market pulp price increases. $2 $1 0 Southern Pine Pulp Logs Sources: FOEX Industries Ltd, Log Lines and Timber Mart-South Quarterly U.S. Timberland Values ($ per acre) $2,5 $2,0 $1,5 $1,0 $5 Pacific Northwest South Figure 6. U.S. Timberland Values in Private Property Markets Timberland market values reported for properties in the NCREIF Timberland Property Index again changed little last quarter. This was likely the result largely of appraisal timing, as many of the properties in the NCREIF database are not appraised fully until year end Source: NCREIF 89 4 Hancock Timberland Investor Second Quarter 24

5 Quarterly EBITDDA Multiples for Privately Traded Timberland (trailing 4-quarter EBITDDA) South Pacific Northwest Figure 7. U.S. Timberland Valuation Multiples in Private Property Markets Operating EBITDDA multiples held relatively steady last quarter. The multiples imply operating EBITDDA yields of 7.9 percent in the Pacific Northwest and 2.7 percent in the South. The yield in the South is so much lower than in the Pacific Northwest because the southern properties in the NCREIF database contain large areas of premerchantable plantations that will be harvested in coming decades. Sources: NCREIF and HTRG analysis 0 Monthly Securitized Timberland Share Value (Indexed to 1 at start date) Figure 8. Hancock Securitized Timberland Index Share prices for most of the public companies in the Hancock Securitized Timber Index ended the quarter at about the same level as they started Index 80 Rayonier Plum Creek 60 Crown Pacific U.S. Timberlands 40 The Timber Company Deltic 20 TimberWest Source: HTRG analysis 0 12/ 12/ 12/ 12/ 12/ 12/ 12/ 12/ 12/ Quarterly U.S. South Timberland Values ($ per acre) $1,2 $1,0 $8 $6 Private Property Market Public Equity Market Figure 9. U.S. South Timberland Values in Public Equity and Private Property Markets Southern timberland values in both private and public equity markets held relatively steady during the second quarter. The gap between private and public values remains narrow by historical standards. $4 $2 Sources: NCREIF and HTRG analysis Hancock Timberland Investor Second Quarter 24 5

6 Are Timberland Properties Less Liquid than Commercial Buildings? continued $1.8 billion of proceeds from timberland sales during the period 11 through 20. Sales on average were transacted at prices in excess of allocated appraised values. We estimate that they have added nearly 1 basis points to annual returns across all HTRG portfolios. (See Disposition Discipline and Its Contribution to the Performance of Timberland Investments, HTRG Research Note N--6.). As one might expect, the greatest premium to appraised value is typically delivered by ongoing operational sales of generally smaller parcels, often conducted to take advantage of higher and better use opportunities. The liquidation of closed-end funds has generated the lowest premiums to appraised value. In summary, the empirical evidence suggests to us that timberland and commercial properties held by institutional investment managers have transacted at roughly similar rates. Timberland property owners usually have the option to sell their property as a whole, or to divide it into smaller ownership units for sale. Timberland does not appear to be a less expensive investment than direct ownership of commercial buildings. Research Team NOTES: Clark S. Binkley, Ph.D. Chief Investment Officer cbinkley@hnrg.com Courtland L. Washburn, Ph.D. Director of Economic Research & Investment Strategy cwashburn@hnrg.com Mary Ellen Aronow Senior Forest Economist maronow@hnrg.com Hancock Timber Resource Group is a division of Hancock Natural Resource Group, Inc., a registered investment adviser and wholly owned subsidiary of Manulife Financial Corporation. 24 Hancock Natural Resource Group, Inc. Figure 1. The composite price for southern sawtimber is based on quarterly average Timber Mart-South published prices for pine sawtimber and chip-n-saw stumpage. Pacific Northwest prices are derived from quarterly average Log Lines published prices for whitewoods and Douglas-fir with internal analysis of logging costs for stumpage calculations. New Zealand export prices are based on New Zealand Ministry of Forestry quarterly average published prices for Radiata unpruned A, J and K sort export logs with internal analysis of logging costs for stumpage calculations. Northeast sawtimber prices are calculated from internal analysis. Figure 2. Quarterly southern pine (westside), kiln dried, 2x4 #2 lumber price published by Random Lengths. Timber Mart-South published southern pine sawlog and chip-n-saw log prices converted to lumber scale using RISI historical lumber recovery rates as published in North American Lumber Forecast. Figure 3. Quarterly Douglas-fir, green 2x4 lumber (Portland rate) and Hem-Fir (coast), kiln dried, 2x4 lumber prices published by Random Lengths. Douglas-fir and whitewood sawlog prices derived from Log Lines published prices for #2 and #3 sawlogs in various regions in the Pacific Northwest converted to lumber scale using RISI historical lumber recovery rates as published in North American Lumber Forecast. Figure 4. Pulpwood composite prices are derived from quarterly average Timber Mart-South published prices for southern pine pulp wood stumpage, Log Lines published whitewood and Douglas-fir pulp logs with internal analysis of logging costs for the Pacific Northwest, and HTRG analysis of Spruce/Fir pulpwood in the Northeast. Figure 5. Quarterly NBSK pulp prices derived from daily list prices reported by FOEX Industries Ltd. Southern pine pulp log prices published by Timber Mart-South. Pacific Northwest Douglas-fir pulp log prices published by Log Lines. Pulp log prices expressed in multiples of 10 to accommodate market pulp pricing scale. Figure 6. Regional NCREIF timberland market value per acre is derived by dividing the total regional market value at quarter end by the number of acres reported in that region. Market values for Northeast timberland were re-estimated for the period 19Q4 through 19Q3 to adjust for what we believe to be an anomalous property included in the NCREIF database during those quarters. Figure 7. EBITDDA multiples are calculated using NCREIF timberland value per acre at quarter end divided by a trailing four-quarter average NCREIF net income per acre. Figure 8. The Hancock Securitized Timberland Index (HSTI) uses a base-weighted aggregate methodology (similar to that used to construct the S&P 5) to calculate a market capitalization-weighted value for seven publicly traded timber-intensive forest products companies. Base weights were readjusted for the emergence of new companies or at the beginning of each year. Dividends are not reinvested. The companies included in the HSTI have no investment relationship with the Hancock Timber Resource Group. Figure 9. Public equity derived from our Timberland Enterprise Value per Southern Equivalent Acre (TEV/SEA) for five timber-intensive publicly traded companies compared to southern timberland values per acre calculated from the NCREIF database. TEV is a quarterly estimate based on total enterprise value (total market equity + book value debt) less estimated value of processing facilities, other non-timber assets and non-enterprise working capital. SEA uses regional NCREIF $/acre values to translate a company s timberland holdings in various regions to the area of southern timberland that would have an equivalent market value. References to expected investment performance in this newsletter are based on historical information and are based on management's projections. Potential for profit as well as for loss exists. 6 Hancock Timber Resource Group High Street, Boston, MA