Hancock Timberland Investor First Quarter 2016

Transcription

1 Hancock Timberland Investor First Quarter 2016 U.S. Housing: The Case for Strong Demographically Driven Housing Demand New home construction and repairs and alterations on existing homes provide the largest end-use markets for the lumber and wood panels produced from North America s commercially managed forests. Consequently, trends in U.S. housing markets are a crucial factor in estimating future demand for timber, and projecting timber prices and timberland values. Residential construction activity is responsive to a variety of factors, including: population demographics, (size, growth, age-composition and geographic distribution of the population); regional economics (employment, income and credit availability); and culture (societal norms associated with forming separate households, marrying and starting a family). Changes in demographic and cultural patterns tend to shift relatively slowly over time, but economic factors can inject sudden and dramatic dislocations into housing markets, and this has definitely been the case over the past decade. In tandem with the Global Financial Crisis, U.S. residential construction collapsed. From a cyclical peak in 2006 to a low-point in late 2009, U.S. housing starts dropped by 79 percent, and then remained at severely depressed levels for another 2.5 years. By 2012, U.S. housing markets began a slow but steady recovery, but by Q1 2016, U.S. housing starts were still 32 percent below long term historical average levels (Chart 1). Part of this severe retrenchment in construction activity was a rational market response to the overbuilt, overlevered and speculative housing markets of the mid-2000s. However, the sluggish performance in home building has failed to keep pace with the housing needs of a growing and demographically changing U.S. population. Low vacancy rates, rising rents and home prices, and extremely low inventories of both new and existing homes for sale (particularly in the lower cost range) all point to an increasingly apparent housing deficit. When the U.S. entered into the deepest post WWII recession in December of 2007, the rate of household Hancock Timber Resource Group First Quarter 2016 Chart 1: U.S. Housing Starts (1980:Q1 2016:Q1) Sources: Federal Research Economic Research, HNRG Research formations dropped significantly as unemployment rose and a wave of home foreclosures occurred (Chart 2, page 2). The average annual number of new households dropped from 1.2 million per year in the period to 0.6 million per year in Post recession in the period , strained economic conditions and limited employment options were particularly harsh for young adults. The age-cohort of year olds, who would have normally entered the work force, moved into their own residence and contemplated marriage and starting a family, delayed these life events. The Federal Reserve Bank of San Francisco s recent Economic Letter addressing household formations among young adults finds that as the year olds age, the decision to set up a household has been merely delayed, not stymied, and is catching up to that of the year olds. The doubling up of households and the increasing numbers of young adults continuing to live at their parent s home restrained the recovery in housing markets (Chart 3, page 2). A key question is whether the depressed household formation rate of the past 7 years is a temporary and cyclical response to the past recession or (Continued on page 2)

2 U.S. Housing: The Case for Strong Demographically Driven Housing Demand (Continued from page 1) Chart 2: U.S. Household Formations increase in the household survey aside, a number of other recent statistics also suggest the existence of a pool of accumulated demand for housing. Indicators pointing to the limitations on the supplies of apartments and houses relative to demand include: low vacancy rates; low availability of homes for sale; and rising home prices. U.S. apartment vacancy rates tracked by the National Association of Realtors have steadily fallen from a peak of 11 percent in 3Q 2009 to 7.0 percent over the last three quarters. Sources: U.S. Census Bureau, Federal Reserve Economic Research, HNRG Research Chart 3: Percentage of Adults Aged Living at Home Source: U.S. Census Bureau indicative of more structural changes occurring in our society s attitudes and needs for housing. Last year, the rate of household formation jumped back to a level of 1.45 million households, which was more in line with historical levels and would suggest that declining unemployment, rising household income and improved consumer confidence are reversing the cyclical economic factors holding housing demand in check. However, a bit of caution is needed in evaluating the strong rise in 2015 s household formation rate, which was derived from the U.S. Census monthly household survey. The results of this survey are based on a relatively small sample, are characterized by a significant amount of volatility and have been subject to major revision when these estimates of the number of U.S. households are reconciled to the actual complete census done once every ten years. The tight supply of housing is also expressed in the limited inventory of new and existing homes for sale. As measured in the number of months needed to satisfy current sales demand, the inventory of new homes for sale has averaged 5.5 months in the first quarter of 2016, while the inventory of existing homes averaged 4.2 months over the same period (Chart 4). A more normal inventory of units for sale for either new or existing homes is 6 months. The tight supply of housing relative to underlying demand has supported significant home price appreciation over the past 4 years. The Case Schiller Index of home prices for 20 metro areas has increased on a nominal basis by 35 percent between the cyclical low in Q and Q1 2016, and is now just 11 percent below the previous peak in Q (Chart 5, page 6). Demand for housing will continue to push against a limited supply as improved economic conditions allow new tiers of the young adult population to move into the rental market, and first-time home buyers to attempt to purchase condominiums and homes. In 2014, the largest Chart 4: U.S. Rental Vacancy Rates and Inventory of Homes for Sale Questions surrounding the reliability of a single year Sources: U.S. Census Bureau, National Association of Realtors (Continued on page 6) Hancock Timber Resource Group First Quarter

3 Quarterly U.S. Housing Starts (1,000 units) and U.S. Softwood Lumber Composite Price (USD per MBF) Figure 1. U.S. Softwood Lumber Prices and U.S. Housing Starts U.S. housing starts started 2016 at a healthy level of 1.13 million units (SAAR), nearly flat with the previous quarter, but up 17 percent compared to the first quarter of The slow but steady progress in U.S. residential construction activity was not sufficient to effect a turnaround in softwood lumber prices. In the first quarter of 2016, the Crow s Framing Lumber Composite Index advanced only incrementally over the previous quarter and was down 10 percent year over year. Lumber prices in the first quarter were held in check by cautious buying prior to the building season and a strong U.S. dollar which has supported increased imports of softwood lumber from Canada and offshore suppliers. Sources: Random Lengths, U.S. Bureau of Census Quarterly Australian Dwelling Unit Approvals (1,000 units), Softwood Lumber Composite Price Index (AUD based) & Softwood Stumpage Price Index (AUD based) Sources: Australia Bureau of Statistics, KPMG and Indufor Timber Market Survey Quarterly New Zealand Softwood Log Export Volume to China (million m3) and Price to China (USD per m3 CIF) Figure 2. Australian Softwood Lumber Prices, Timber Prices, and Dwelling Unit Approvals In the first quarter of 2016, Australian dwelling approvals (a key indicator of residential construction activity) continued to edge lower and were down 7 percent from the peak reached in the first quarter of The emerging downward trend in Australian housing activity reflects headwinds in the overall Australian economy and weakness in global commodity markets. Structural lumber is heading in the same direction as housing, with the lumber price index down 2 percent from its first quarter 2015 peak. Australian sawlog prices are lagging movements in the lumber index, and as of the final quarter of 2015 were still holding at peak levels, but are expected to lose some ground in 2016 along with housing and lumber. Figure 3. New Zealand Log Exports After dropping 10 percent in 2015, New Zealand s sawlog export volumes and prices to China stabilized a bit in the first quarter of New Zealand sawlog export volumes to China in the first quarter were up 10 percent from the previous quarter, but were still down 5 percent year over year. In the first quarter, the USD denominated price of New Zealand sawlogs in China held on to nearly all of the substantial fourth quarter s, 23 percent jump in price, despite some recovery in shipping rates and a strengthening of the NZ dollar. The outlook for New Zealand log exports to China remains clouded, given the on going restructuring occurring in the Chinese economy. Sources: RISI, International Wood Markets Inc. Hancock Timber Resource Group First Quarter

4 Quarterly Exchange Rates Between USD and Commodity Currencies Source: Pacific Exchange Rate Service Quarterly Average Regional Composite Prices for Softwood Sawtimber Stumpage (USD per m3) Figure 4. Exchange Rates The U.S. dollar depreciated in the first quarter of 2016 against the currencies of Australia, Brazil, Canada, Chile, and New Zealand as a result of improved commodity prices and reduced expectations for a rate hike by the U.S. Federal Reserve. However, the depreciation in the first quarter of 2016 was not enough to reverse the gains that the USD made year-over-year against most currencies. Comparing the first quarter of 2016 to the first quarter of 2015: the CAD was down 2.1 percent; CLP down 7.3 percent; and NZD down 8.0 percent. The BRL had the largest decrease compared to the USD, falling 10.8 percent year-over-year in the first quarter, reflecting the deep recession of Brazil s economy and the high degree of political uncertainty. Only the AUD appreciated by 0.70 percent against the USD year-over-year in the first quarter. Figure 5. Regional Softwood Sawtimber Stumpage Prices Softwood sawlog stumpage prices denominated in U.S. dollars moved lower in the U.S. and higher in New Zealand first quarter. Pacific Northwest domestic log prices slipped 1 percent from fourth quarter, yet 18 percent from first quarter of Stumpage prices in the U.S. South fell slightly from fourth quarter and moved sideways from first quarter of New Zealand log prices first quarter gained back most of last year s price reductions, averaging just six percent below first quarter 2015 levels. Australia log prices reported on a 6 month basis will be updated post June release. Sources: Log Lines, Timber Mart-South, NZMPI, and KPMG Quarterly Prices for Market Pulp and Delivered Pulpwood (USD per metric ton) Figure 6. Pulp and Pulpwood Prices, U.S. South and Brazil In the first quarter, the price of Bleached Eucalyptus Kraft Pulp (BEKP) eased from the cyclical peak reached in the final quarter of Southern Bleached Softwood Kraft (SBSK) pulp prices in the first quarter held close to the previous quarter, and regained a slight (2 percent) premium over the BEKP price. Pine pulpwood delivered prices in the U.S. South continued to trend higher at a modest rate, pressuring profit margins at pulp mills in the U.S. South, while Brazilian eucalyptus pulpwood prices denominated in U.S. dollars, edged lower, returning Brazilian wood fiber costs to the low levels of the mid-2000s. Sources: Hawkins Wright, Timber Mart-South and STCP Brazil Hancock Timber Resource Group First Quarter

5 U.S. Timberland Annualized Operating Cash Yields (percent per year) Sources: NCREIF and HTRG Research Figure 7. U.S. Timberland Operating Cash Yields U.S. cash yields from private timberland operations, as reported by NCREIF, were 1.7 percent in the first quarter of 2016, which was down from the previous quarter s 1.9 percent. The decrease in the first quarter, reflected most notably very low cash yields in the U.S. West a result of the regions log harvest volumes moving burned wood, but also some stalled log harvests from timberlands of NCREIF contributors a result of several large and smaller timberland title transfers which can slow or halt harvesting short term. First quarter timberland cash returns were the lowest reported by NCREIF over the past 7 years. Monthly Securitized Timberland Share Value Source: HTRG Research Quarterly U.S. South Timberland Values (USD per acre) Figure 8. Hancock Securitized Timberland Index The Hancock Securitized Timberland Index, a marketcapitalized weighted performance Index of timberland held in public market ownership fell 13.6 percent in the first quarter of 2016 from the previous quarter, and 20 percent from the first quarter of This is mainly due to large declines in the Index for the months of January and February. The majority (almost 80 percent) of the Index consists now of Weyerhaeuser after the successful merger with Plum Creek. Rayonier increased 11.2 percent from last quarter due to cost cutting initiatives, which led to a large beat on its consensus earnings estimate. The three other companies in the Index, Potlatch (up 4.2 percent), Deltic (up 2.2 percent) and CatchMark Timber (down -3.1 percent), saw market values change modestly compared to the previous quarter. Figure 9. Timberland Enterprise Value In the first quarter, timberland held in private financial ownership in the U.S. South averaged $1,781 per acre, which represents an $8 per acre year-over-year decrease. During the first quarter of 2016, public timberland values, measured by the Timberland Enterprise Value per Southern Equivalent Acre (TEV/SEA), bounced back from a tough The TEV/SEA increased by $102 or 5.3 percent from the previous quarter. The TEV/SEA for the first quarter still falls $15 below what it was in the first quarter of Sources: NCREIF and HTRG Research Hancock Timber Resource Group First Quarter

6 U.S. Housing: The Case for Strong Demographically Driven Housing Demand (Continued from page 2) cohort in the population were year olds, and between 2014 and 2024, the U.S. Census Bureau projects that the population age segment of 18 to 44 year olds will increase by 18 million people. The growth in this segment of the population will have a major impact on the demand for housing over the next decade. In a recent study published by the Mortgage Banker s Association analyzing the demographic underpinnings of the housing demand over the coming ten years, demographic changes alone are estimated to result in 13.9 million additional households over the next decade. This estimate assumes that gender, age and race specific household formation rates remain at the low 2014 levels. In a second scenario where household formation rates revert back to long-term trend levels, the growth during the period moves up to 15.8 million households. The combination of the seriously reduced investment in U.S. housing over the past decade and the impending demographic changes that will result in a surge in the number of young adults over the next ten years should assure solid demand for an updated and expanded inventory of housing. Chart 5 : S&P/Case-Shiller U.S. Home Price Index (2000=100) Source: S&P Dow Jones Indices Fisher, L.M. and Woodwell, J. July, Demographics and the Numbers Behind the Coming Multi-Million Increase in Households. An MBA Research Report. Furlong, Fred. May 26, FRBSF Economic Letter: Household Formation among Young Adults. HNRG Research Team Court Washburn Managing Director and Chief Investment Officer cwashburn@hnrg.com Keith Balter Director of Economic Research kbalter@hnrg.com Mary Ellen Aronow Senior Forest Economist maronow@hnrg.com Bill Devens Senior Agricultural Economist bdevens@hnrg.com Elizabeth Shestakova Economic Research Analyst eshestakova@hnrg.com Hancock Timber Resource Group is a division of Hancock Natural Resource Group, Inc., a registered investment advisor and wholly owned subsidiary of Manulife Financial Corporation. NOTES: Figure 1. The source for the U.S. Housing Starts is U.S. Bureau of Census. The Housing Starts data includes Single-family and Multi-family starts. Random Lengths Lumber Composite Index data is used for lumber prices. Figure 2. Quarterly Australian Dwelling Unit Approvals is published by the Australian Bureau of Statistics. The Lumber Index is published by Indufor Timber Market Survey using Softwood Structural lumber prices (Blended Price - 60 percent MGP 10 90x35x4800, 40 percent MGP 10 70x35x4800). Log Price Index is calculated using the (APLPI) Radiata Pine Domestic Stumpage prices. The log price is an average of Intermediate and Medium sawlog prices Figure 3. Quarterly New Zealand softwood log export volume to China and China Import prices are published by the RISI International Timber Service. Figure 4. Monthly average Exchange Rates are published by the Pacific Exchange Rate Service. Figure 5. Quarterly Softwood Sawtimber Stumpage Prices for the U.S. Pacific Northwest is reported in Loglines published by RISI. The weighted index is made up of 50 percent Domestic Douglas-fir (47 percent #2 and 53 percent #3 Sawmill sorts) and 50 percent Whitewoods (47 percent #2 and 53 percent #3 Sawmill sorts). U.S. South prices are published by Timber Mart-South (60 percent Southern Pine Sawtimber and 40 percent Chip-n- Saw). Australian domestic prices are calculated using the KPMG Australian Pine Log Price Index (APLPI) Radiata Pine Domestic Stumpage prices. The log price is an average of Intermediate and Medium sawlog prices converted to USD/m3. New Zealand radiata pine export log prices are a blend of A,K and J sort logs published by New Zealand Ministry of Primary Industries converted to USD. Figure 6. Quarterly Market Pulp prices are published by Hawkins Wright. U.S. Southern Pine Pulpwood prices are published by Timber Mart-South. Brazil Eucalyptus Pulpwood prices are published by STCP Engenharia de Projetos Ltda. Figure 7. Annualized Operating Cash Yields are published by National Council of Real Estate Investment Fiduciaries (NCREIF). Yields are calculated using 60 percent U.S. South and 40 percent U.S. West. Figure 8. The Hancock Securitized Timberland Index (HSTI) uses a baseweighted aggregate methodology (similar to that used to construct the S&P 500) to calculate a market capitalization-weighted value for six publicly traded timber-intensive forest products companies. Base weights were adjusted 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 Hancock Timber Resource Group. Figure 9. Public equity values are derived from our Timberland Enterprise Value per Southern Equivalent Acre (TEV/SEA) calculation for five timberintensive publicly traded companies as 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. Hancock Natural Resource Group, Inc. References to expected investment performance in this newsletter are based on historical information and are based on managements projections. Potential for profit as well as for loss exists. Hancock Timber Resource Group First Quarter