2016 Strategic Issues for US Pacific Northwest Timberlands

Transcription

1 Date 2016 Strategic Issues for US Pacific Northwest Timberlands Nick Blacklock Director, Global Resource Planning

2 Hancock Natural Resource Group Company Overview Manulife Financial Corporation Hancock Natural Resource Group, Inc Hancock Timber Resource Group (1985) Hancock Agricultural Investment Group (1990) Hancock Renewable Energy Group (2011) Over $11.4 billion global equity investments in timberland Over $2.3 billion global equity investments in farmland Global equity investments in biomass r to energy

3 Key Drivers of Western US Timber Strategies Forest Resource Market Fundamentals U.S. Housing Fundamentals China s Imports of Logs and Lumber Trends in Timberland Transactions & Valuations

4 US Pacific Northwest Timberlands Landscape Across WA, OR & ID: 70mm acres of timberlands Federal government is the majority landowner (60%) Industrial ownership accounts for 11.5mm acres (17%) Total harvest approximately 8.5 bbf/year for 2014,with the private sector contributing over 75% of the harvest volume Approximately 200 wood using facilities Sources: WFPA, Oregon.gov, IDL, RISIinfo

5 The West and East of Western Timberlands Westside/Eastside management cater to vastly different biological performance and markets Westside notables: High growth rates and intensive management Strong domestic and export markets Eastside notables: Mixed species un-even aged management Limited but capable markets

6 Markets Fundamentals Date

7 Market Fundamentals Short-term outlook reflects a mixed environment with significant economic and market cross-currents, leading to heightened uncertainty and volatility Longer-term prospects are generally healthy, but will depend on the on-going recovery in U.S. housing and a stabilization of growth in China s economy and construction sector. Demand Factors: Solid prospects for U.S. housing activity Headwinds on international trade of logs and lumber Supply Factors: Downward pressure on costs with lower oil prices Tightening timber inventories in PNW and Canada

8 Housing Starts (millions) US Housing Starts : a Key Litmus Test of the Economy Solid Fundamentals: Improved job market and early signs of income growth Housing affordability still attractive Despite the recent FED interest rate hike, mortgage rates remain low Pent-up Demand: A recent study (07/2015) by Mortgage Bankers Assoc. estimates a range of 13.9 to 15.9 million additional U.S. households between 2014 and US Housing Starts Single-Family Multifamily Source: RISI Info. January 2016

9 Indexed to January 2014 Depreciating Currency in Competing Supply Regions USD continues to gain strength Outlook for U.S. economy remains positive vs deteriorating expectations for China and emerging economies Federal Reserve began raising interest rates at the end of 2015 Strong dollar is a hurdle for exports of PNW logs and encourages increased imports of softwood lumber and plywood The strength of the US dollar is attracting lumber imports. U.S. Softwood Lumber Imports have risen by 10% from 2014 to FX of Key Producers of Softwood Sawlogs and Lumber USD per Base Currency Jan = 1.0 Canada Euro Chile Brazil New Zealand Source: Pacific Exchange Rate, HNRG Research, FX through 12/31/2015

10 Log Export Slowdown a Trend or a Pause? China s expanded imports of lumber and logs were key elements in the recovery of timber demand in U.S. PNW in the wake of the GFC Since 2012, growth in China s log and lumber imports has lost forward momentum and slipped in 2015 (25% in volumes and 30% in prices) Opinions vary on duration and magnitude, but we expect 3+ years of volatility with more moderate growth going forward Billions Board Feet,Int. 1/4 inch US West Coast Softwood Exports Source: RISI December 2015, Wood Resource Quarterly

11 Increased Competition from Canada in U.S. Lumber Markets Short Term: The Softwood Lumber Agreement (SLA) expired in Q4, 2015 allowing for lumber sales without duty or tax for Favorable FX for CDN also an economic tailwind for Canadian producers. Medium-Long Term: Offsetting the above is a decline in beetle damaged inventory in the west and reduced AAC in the east Source: RISI December 2015

12 Average Price ($/mbf) Log Prices Historical Quarterly Average U.S. Pacific Northwest Prices Dynamic Markets: $800 Steady price improvement post GFC with the Chinese export market leading the pack in 2010 $700 $600 Rebound of domestic markets through 2014 led to cyclical highs aligned with domestic lumber and plywood prices Current log markets have softened with the decline in export demand Increased imports putting price pressure on domestic manufacturers $500 $400 $300 $200 $100 $- Quarter Douglas-Fir Domestic Douglas-Fir China Export Whitewoods Domestic Whitewoods Export Source: LogLines

13 Oil Economics The recent collapse in oil prices will have direct and indirect impacts on the cost structure of timber operations. Downward pressure on Log and Haul costs, which are aligned to diesel prices. Competition for labor for harvesting and delivery operation with the energy sector will ease, eliminating roadblocks to expanding harvest levels. Energy prices unlikely to bounce back sharply in the near-term, based on weakening global economic growth and world production still rising Source: RISI Info, Macrobond

14 Inventory Volume BBF Harvest Volume BBF Western US Timberland Inventory Trending Lower A 2012 study by Timberland Appraisal Inc. projects a tightening of timber supply on private timberlands in the West over the next decade (- 8%). Managers have largely worked thru volume deferred during the GFC and continue to market aggressively with favorable markets. The decline is attributed to the current age class profile, increased harvest pressure and some modest land conversion pressure ID, OR, WA Private Timberland Inventory Projections OR WA ID Harvest 6

15 Date Timberland Valuations and Transactions

16 Q4 Est. Sales Value (millions) Sales Acres Commercial Timberland Transactions Over the course of the last 10 years approximately $40 billion has been invested in U.S. timberlands on over 450 major transactions covering almost 30 million acres Transaction activity has declined in parity with the wind down of the integrated companies Investors held on to assets during the GFC period We are now in a period of active asset trading at historic values $10,000 $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $- U.S. Timberland Sales History 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 - Acres (000's) Value ($ 000's) Source: RISIInfo

17 Transcation Value ($MM) Who s Buying the Forest? The mix of buyers in the present environment speaks to the growing and diverse demand for commercial timberlands across the U.S. $9,000 $8,000 $7,000 Timberland Buyers Private investors are capitalizing on strategic opportunities using low cost debt Mill owners re-entering the timberland market to avoid competing for log supply and reduce their exposure to the competition of open market log sales $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $ Year TIMO Private Industry REIT Source: RISIInfo

18 $ / acre Oregon and Washington Transactions Obvious upward drift in valuation $7,000 $6,000 Transaction Size and $/acre In recent years, markets driven by an increasing number of smaller offerings $5,000 $4,000 Wider spread in valuations capture diversity of assets and buyer motivation $3,000 $2,000 The large-scale (wholesale) discount however, is a thing of the past! $1,000 $0

19 The Most Commonly Asked Question in Timber! Competition across the asset class is driving values up and putting pressure on returns Compression in discount rates is not unique to timberland, as similar declines in discount rate have occurred for Commercial Real Estate, Farmland and Infrastructure Caveats not to be ignored when isolating the Discount Rate: Strategic value Price projections Deal leverage Yields Exit strategy 7.00% 6.50% 6.00% 5.50% 5.00% 4.50% 4.00% 3.50% 3.00% PNW Westside Discount Rates Source: MB&G 2016

20 NCREIF - Timberland Values Show Strengthening Returns NCREIF Timberland Index Performance - West Returns showed steady improvement post GFC till peaking in 2013, with strengthened cashflows and capital appreciation (see previous slide!) 40% 30% 20% Decent property income after getting slammed during the recession. Going forward property income will remain aligned with improvement in the U.S. economy and housing; less clear if Capital returns will return to the peak levels of % 0% -10% -20% Capital Return Income Return Source: NCREIF

21 Date Conclusions

22 Looking ahead at 2016 and Beyond Short Term: Mixed environment with cross currents Housing to remain solid Softening log prices given the Import/Export dynamics Costs should remain in check capitalizing on energy markets Valuations will continue to be supported by robust sales interest Medium to Long Term: Tighter inventory supply in the region and Canada China will get thru this adjustment period U.S. housing activity will continue to support timber markets over the next decade Source: RISI December 2015

23 Western Timberlands Investment Thesis Why invest in timberlands in the U.S. Northwest? The U.S. West contains a diverse set of opportunities for timberland investors supported by strong returns, deep and diverse markets and a well balanced risk scorecard. Market Risk Biological Risk Liquidity Risk Policy Risk Low Low Low Medium Timber and land assets in the U.S. West remain resilient investments and as such allow for flexible and dynamic strategies. Participants can: Adjust harvest levels and timing to meet yield requirements Manufacture new log products aligned with end-use markets Invest in growth thru advanced silviculture and infrastructure Benefit from established and evolving non-timber income streams