Hancock Timberland Investor Fourth Quarter 2016

Transcription

1 Hancock Timberland Investor Fourth Quarter Timberland Investment Performance U.S. private timberland investments returned 2.59 percent in 2016, consisting almost entirely of income, as capital appreciation made little contribution. As in prior years, we devote our fourth quarter issue of the Hancock Timberland Investor to a review of investment performance of U.S. private timberland properties. The highest profile measure of timberland property performance in the U.S. is the NCREIF (National Council of Real Estate Investment Fiduciaries) Timberland Property Index, which reports returns for institutional investments throughout the United States. Chart 1: Timberland Calendar-year Performance at December 31 (percent per year) The total return for the Timberland Property Index for 2016 was 2.59 percent, a 238 bps decrease from 2015 s 5.0 percent total return, and the lowest total return for the Index since (See Chart 1. Timberland Calendar-year Performance ). NCREIF s reported property-level operating income in 2016 of 2.6 percent is slightly lower than 2015 (2.7 percent) and just shy of the ten year average operating income return of 2.8 percent. However, timberland capital appreciation in 2016 was nearly flat, with a 2.25 percent step-down in appreciation from the previous year, and down 7.46 percent from the 2014 post-gfc peak. The collapse in timberland capital appreciation over the past two years reflects the moderation in expectations for U.S. timberland returns, and concerns that the rebound in timberland transaction prices has out-paced market fundamentals. In 2015 and 2016, markets were repeatedly disappointed on a number of fronts: the excruciatingly slow pace of the U.S. housing recovery; declining exports of logs to China; surging imports of softwood lumber from Canada and plywood imports from South America; and a troubling lack of forward movement in southern pine timber prices. Adding to the erosion of confidence in the prospects for timberland returns in 2016 was heightened uncertainty surrounding the outlook for both the domestic and global economy in response to the extremely divisive U.S. presidential campaign and election, and the success of the Brexit referendum. As we enter 2017, many of the factors which diminished the rate of timberland appreciation over the past two years have begun to abate. In late 2016 and the initial months of 2017, U.S. residential construction activity has gained new momentum, particularly for single-family homes. U.S. total log exports finished 2016 surprisingly well, posting a 6 percent gain in volume over 2015, despite the strong U.S. dollar. The Trump administration s aggressive position on trade has improved the probability that significant trade restrictions will be re-imposed early in 2017 on the shipment of Canadian softwood lumber into the U.S. In addition, concerns about the short-term outlook for both the U.S. and global economy have improved in the first Sources: NCREIF and HTRG Research quarter of this year, with the U.S. stock market reaching new highs, the U.K. economy registering healthy growth following the Brexit victory, and the IMF and World Bank revising up their projections for global economic growth. These improved fundamentals for timber suggest that the downward correction in timberland appreciation rates that occurred in may be over, and that 2017 could witness a return to more positive territory. Timberland Performance Regionally At year-end 2016, 446 timberland properties were included in the NCREIF database. These properties contained over 13.2 million acres of timberland in the United States, with a combined market value of $23.6 billion. Timberland properties in the Index are grouped into four regions which are reported separately. The U.S. Index is heavily weighted toward the South (at 69 percent of the Index market value). A quarter of the Index value is in Northwest timberland, and the remaining eight percent of the Index value is split between the Northeast and the Lake States. Regionally, the 16 properties in the Lake States spread over 1 million acres led performance returns, with a total return of 6.4 percent for the year. Timberland in the Northwest region, comprised of 85 properties covering 1.9 million acres, posted a 2.5 percent total return for the year. The 312 properties in the South, covering 9.1 million acres returned 2.9 percent for the year. Northeast timberland performance was negative at percent total return for 2016, offsetting the (Continued on page 2) Hancock Timber Resource Group Fourth Quarter 2016

2 2016 Timberland Investment Performance (Continued from page 1) Table 1: NCREIF Regional 2016 Timberland Performance Chart 2: NCREIF Annual Cash Yield vs U.S. Log Exports above average gains realized in the Lake States. (See Table 1. NCREIF Regional 2016 Timberland Performance) Similar to the broader U.S. Timberland Index, the 2016 regional timberland returns were largely the result of operating income, with limited contribution from capital appreciation. The two largest regions within the Index, the Northwest and South, preformed similarly in 2016; minimal capital appreciation (0.33 percent in the South and percent in the Northwest) and operating income driving total returns, (2.58 percent in the South and 2.59 percent in the Northwest). In the Northeast, operating income at 1.9 percent in 2016 was close to historical averages, but was not sufficient to offset a sharp reversal in capital appreciation of -6.8 percent, resulting in a total return for the year of -5.0 percent. The Lake States was the only region in 2016 where timberland returns registered an unequivocal strong performance, with total returns of 6.4 percent, delivering healthy positive returns for both income (2.8 percent) and capital appreciation (3.4 percent). Offshore Trade in Logs and Lumber: a Factor in the Convergence of Cash Returns in the Northwest and the South Timberland in the Northwest and the South reported the same annualized cash yield of 2.6 percent in Historically, the Northwest cash yields have been higher than cash yields in the South. Northwest cash yields have in the past benefited from a higher proportion of properties with more mature stands than in the South, allowing for greater per-acre timber harvest volumes. Likewise, prices for Northwest timber are higher than prices for the commodity-like southern pine timber grown on timberland in the South. Cash yields in the Northwest in 2016 are half of what the average yield over the past twenty years has been, and are the third lowest since NCREIF began collecting timberland returns in In contrast, the 2016 cash yields from operations on southern timberland are at historic twenty year averages. The decline in Northwest cash yields is the result of numerous factors, including the mix of timber products produced and sold; movements in timber prices; and changes in labor and transportation costs. One prominent change in the market for Northwest timber has been the tapering off of log export volumes to China. A six year run of increased volumes of log exports from the Northwest began in 2010 and reached a peak in 2013 of 69.9 million cubic meters. Since 2013, Northwest export volumes have dropped 30 million cubic meters below Sources: U.S. Foreign Agriculture Service, NCREIF, HNRG Research peak volumes, a decline of 66 percent. Cash yields from Northwest timberland operations rose sharply along with the expansion of the region s log exports, reaching cash yields over 4.0 percent in the peak log export years of 2011 and 2013 (See Chart 2 NCREIF Annualized Cash Yield vs U.S. Log Exports). As markets for softwood logs and lumber in China have become increasingly competitive over the past few years, Northwest timber producers have lost market share and become more reliant on domestic demand at the region s sawmills and plywood plants. This erosion in off-shore demand has resulted in a stabilization of the region s total sawtimber harvest and an easing in timber prices. In the fourth quarter of 2016, the stumpage price for the Northwest benchmark species Douglasfir was at $56 per cubic meter, 39 percent below the previous peak in the first quarter of 2014 of $78 per cubic meter. (See Figure 5, Regional Softwood Sawtimber Stumpage Prices on page 4). In contrast to the Northwest, markets for the South s timber has been focused on domestic wood demand with limited exposure to exports. Consequently, cash yields in the South missed the run-up in experienced in the Northwest. However, the competitive pricing of southern pine timber, coupled with the initiative of southern timberland managers to expand and diversify markets, has resulted in some successes in the development of export opportunities. Trade statistics produced by the Foreign Agriculture Service show volumes of southern pine log and lumber exports have increased for several years in a row, reflecting: improved logistics to Asia through the expanded Panama Canal; investment in improved port infrastructure in the U.S. South; and growing acceptance of southern pine in China. Southern pine log exports, although a small component of the total softwood log exports out of the U.S., have increased 250 thousand cubic meters in 2016 from 2015 levels, developing from a basically flat to nonexistent base in 2008 (See Chart 2 NCREIF Annual Cash Yield vs U.S. Log (Continued on page 6) Hancock Timber Resource Group Fourth Quarter

3 Quarterly U.S. Housing Starts (1,000 units) and U.S. Softwood Lumber Composite Price (USD per MBF) Sources: RISI, 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 in China (USD per m3 CIF) Sources: RISI, International Wood Markets Inc. Hancock Timber Resource Group Figure 1. U.S. Softwood Lumber Prices and U.S. Housing Starts U.S. housing starts in the final quarter of 2016 jumped 6 percent from the previous quarter, breaking out of the relatively flat performance of the past six quarters. For the full year 2016, housing starts increased 5 percent over In 2016, the proportion of single family starts rose to 67 percent from 64 percent in The Crow s Framing Lumber Composite Index remained nearly flat in the fourth quarter compared to the third quarter, despite moving into the seasonally slow winter construction period. On a year-over-year basis, softwood lumber prices in third quarter were 12 percent higher than in the fourth quarter a year earlier. Currently, the U.S. International Trade Commission is investigating charges of unfair trade practices and dumping by Canadian sawmills, which could result in Canadian imports of softwood lumber being subject to countervailing duties early in the second quarter of Figure 2. Australian Softwood Lumber Prices, Timber Prices, and Dwelling Unit Approvals In the fourth quarter of 2016, Australian dwelling approvals (a key indicator of residential construction activity) dropped sharply (15 percent) from the previous quarter, reaching 49.6 million units, the lowest level since the second quarter of This forward looking sign of a weakening in Australia s housing activity reflects an easing in the overall Australian economy, tied to weakness in global commodity markets and slower growth in China. Structural lumber prices held at last quarters prices, which are 3 percent below third quarter prices last year. Australian sawlog stumpage prices, in AUD, for the six months ending December, were flat from the prior six months. Figure 3. New Zealand Log Exports After setting a new volume peak in the third quarter of 2016, New Zealand log exports made a downward correction in the final quarter of the year, dropping 12 percent to 2.9 million cubic meters. Even with this correction, sawlog exports to China from New Zealand were up 34 percent compared to the same quarter a year earlier. In 2016, demand for New Zealand radiata pine logs in China was boosted by a revived construction sector fueled by increased credit availability. The price of New Zealand sawlogs delivered to China, denominated in USD, took another upward step in the fourth quarter, gaining 8 percent over the previous quarter. By the fourth quarter of 2016, the USD denominated price of New Zealand sawlogs delivered in China had recovered significant ground from the setback experienced in , but still was 19 percent below the peak in the first quarter of Fourth Quarter

4 Quarterly Exchange Rates Between USD and Commodity Currencies Figure 4. Exchange Rates The U.S. dollar made modest to moderate gains in the fourth quarter of 2016 against the currencies of Australia, Brazil, Canada, Chile and New Zealand. Compared to the third quarter, the U.S. dollar appreciated against the currencies of Canada and Chile by roughly 2 percent, 4 percent against the New Zealand kiwi, 5 percent versus the Australian dollar, and an incremental gain under 1 percent against the Brazilian real. Looking out to the first half of 2017, the U.S. dollar is likely to continue to trend higher, based on higher expectations for U.S. economic growth and the announced intentions of the Federal Reserve to implement 2 to 3 further increases in the Fed Fund rate in Source: Pacific Exchange Rate Service Quarterly Average Regional Composite Prices for Softwood Sawtimber Stumpage (USD per m3) Sources: Log Lines, Timber Mart-South, NZMPI, and KPMG Quarterly Prices for Market Pulp and Delivered Pulpwood (USD per metric ton) Sources: Hawkins Wright, Timber Mart-South and STCP Brazil Hancock Timber Resource Group Figure 5. Regional Softwood Sawtimber Stumpage Prices In the fourth quarter, New Zealand softwood sawtimber stumpage prices denominated in U.S. dollars dropped 2 percent from the previous quarter after staging a dramatic recovery over the previous three quarters, and are now close to the levels sustained in mid U.S. Pacific Northwest sawtimber prices benefited from a combination of export demand and strong domestic sawlog markets and gained 3 percent over the previous quarter. In the U.S. South, timber prices continue to be held down by ample timber inventories throughout the region in spite of production increases at domestic sawmills and plywood plants and rising exports of both logs and lumber. In the fourth quarter, U.S. southern pine sawlog prices were flat from third quarter. Australia radiata stumpage prices, in U.S. dollars, dropped just over 1 percent fourth quarter. Figure 6. Pulp and Pulpwood Prices, U.S. South and Brazil In the final quarter of 2016, the price of both Bleached Eucalyptus Kraft Pulp (BEKP) and Southern Bleached Softwood Kraft (SBSK) edged lower, with BEKP losing 2 percent compared to the previous quarter and SBSK down 1 percent. With global hardwood market pulp capacity continuing to expand, hardwood pulp prices will remain vulnerable to further declines in Pine pulpwood delivered prices in the U.S. South lost 2 percent compared to the second quarter, facing competition from the growing availability of manufacturing residuals from expanding production at the region s lumber mills. Eucalyptus delivered pulpwood prices in Brazil slipped 4 percent from the previous quarter, but were still up 12 percent from the fourth quarter of Fourth Quarter

5 U.S. Timberland Annualized Operating Cash Yields (percent per year) Figure 7. U.S. Timberland Operating Cash Yields U.S. cash yields from timberland operations in the fourth quarter of 2016 at 2.37 percent, were up 7 basis points from third quarter yields, and the fourth quarter was third consecutive quarterly increase. Cash yields for the fourth quarter were above last year s final quarter yield of 2.22 percent, and above the average fourth quarter cash yield reported over the previous five years (2.17 percent). Sources: NCREIF and HTRG Research Monthly Securitized Timberland Share Value (indexed to 100 at start date) 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 5 percent in the fourth quarter from the previous quarter and was down just over 2 percent year-over-year. The Index s decrease is largely due to a decrease in Weyerhaeuser stock over the quarter, which fell 7 percent since the end of Q3. This moderate decrease masks a volatile quarter for the security, which fell 8 percent from the end of September to October before again rallying over 15 percent by middecember. Senior level turnover, mixed Q3 earnings, price normalization following favorable analyst reports in the third quarter, and overall political uncertainty helps explain this volatility. Other firms in the Index performed well generally; Deltic, and Potlatch rallied 14 percent and 7 percent, respectively, both driven by a favorable Q3 earnings release. Rayonier remained flat over the quarter and Catchmark fell 4 percent likely due to political fallout. Figure 9. Timberland Enterprise Value In the fourth quarter, timberland held in private financial ownership in the U.S. South averaged $1,782 per acre, representing a small increase over third quarter and basically flat year-over-year. Public timberland values, measured by the Timberland Enterprise Value per Sothern Equivalent Acre (TEV/SEA), decreased 7 percent over the quarter, and -0.5 percent year over year, largely due to a poor performance in Weyerhauser stock. In the fourth quarter, Weyerhauser comprised 78 percent of the Index s value. Sources: NCREIF and HTRG Research Hancock Timber Resource Group Fourth Quarter

6 2016 Timberland Investment Performance (Continued from page 2) Exports, page 2). Exports of southern pine lumber in 2016 increased 13 percent from 2015 levels, a 156 percent increase from 2008 export levels (See Chart 3, U.S. Northwest and South Lumber Exports). Chart 3: US Northwest and South Lumber Exports Sources: U.S. Foreign Agriculture Service 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 wdevens@hnrg.com Elizabeth Shestakova Economic Research Analyst eshestakova@hnrg.com Keith Goplerud Economic Research Analyst kgoplerud@hnrg.com 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. RISI s Crows Framing 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 from Macrobond. 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 Agri-Fax A,K and J log sort prices and A,K and J log prices 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 five 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. 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 is a division of Hancock Natural Resource Group, Inc., a registered investment advisor and wholly owned subsidiary of Manulife Financial Corporation. Hancock Natural Resource Group, Inc. Hancock Timber Resource Group Fourth Quarter