Hancock Timberland Investor

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Hancock Timberland Investor Fourth Quarter 23 23 Timberland Investment Performance The investment performance of timberland properties in the United States rebounded last year as the NCREIF

1 Hancock Timberland Investor Fourth Quarter Timberland Investment Performance The investment performance of timberland properties in the United States rebounded last year as the NCREIF Timberland Property Index posted a positive return of 7.7 percent. Timber prices, timberland discount rates and timberland values remained relatively stable during the year. Returns were therefore driven largely by income from timber harvests and growth in timber inventory. With 23 behind us, we again devote our fourth quarter issue of Hancock Timberland Investor to a review of the past year s timberland investment performance. Our measure of timberland performance is the NCREIF (National Council of Real Estate Investment Fiduciaries) Timberland Property Index (see HTI 3Q2 for a description of the Index), which reports returns for institutional investments in timberland properties throughout the United States. Annual Return 2% 15% 1% 5% % -5% -1% Chart 1: NCREIF Timberland Property Index - Annual Returns Source: NCREIF EBITDDA Capital The fourth quarter NCREIF results are much more useful than those reported for other quarters because many properties in the NCREIF database are valued only at year end. So calendar year returns present a relatively complete picture of market value changes. NCREIF timberland properties numbered 268 as of fourth quarter 23.These properties contained over 4.8 million acres, with a combined market value of $5.8 billion. Sixty-eight percent of the Index value was in the, 26 percent in the Pacific Northwest and the remaining 6 percent in the Northeast. Properties in the Pacific Northwest had the greatest per-acre market value, with a fourth quarter average of $1,863. ern timberland properties averaged $1,79 per acre.timberland in the Northeast was valued at $1,142 per acre, a value more than double that reported at the conclusion of 2.This jump in Northeast market value was the result of a large shift in the intra-regional sample of properties away from the lower value New England states to the much higher value Alleghany region of northern Pennsylvania and southern New York. Performance Results The total return for the Timberland Property Index during 23 a positive 7.7 percent moved closer to historical averages. continued on page 2 Hancock Timber Resource Group High Street, Boston, MA

2 23 Timberland Investment Performance continued NCREIF separates timberland returns into a property-level operating income or EBITDDA component and a capital appreciation or depreciation component.the EBITDDA return was a positive 3.7 percent a value similar to that over the past five years.the cash yield from operations after deductions for capital expenditures was 3.1 percent. NCREIF capital returns were a positive 3.9 percent, a strong turnaround after three consecutive years of falling timberland property values. Regionally, timberland in the Northeast produced the highest returns over the year at 12.2 percent. Properties in the Pacific Northwest and the produced total returns very similar to the overall Index. Chart 2: 23 Regional Timberland Returns EBITDDA Capital Total Pacific Northwest Northeast 2.85% 6.33% 3.82% 4.6% 2.14% 8.13% 7.54% 8.57% 12.17% As usual, EBITDDA returns were highest in the Pacific Northwest, as properties in this region typically contain a greater share of mature, merchantable timber that is available for harvest.the, as usual, had the lowest EBITDDA return, as properties there typically have a greater share of young, pre-merchantable timber. What Drove Timberland Performance? NCREIF timberland market values in 23, as measured by appraisals and actual timberland sales, rose in the and fell in the Pacific Northwest.To isolate the influence on these NCREIF property values of changing timberland market conditions from the effect of timber inventory growth and changes in the sample of properties in the Index, we recalculate timberland values in each region for standardized fully regulated forests based on NCREIF total returns (see HTI 2Q 2 for a full description of our methodology). (As we noted earlier, per-acre values in the Northeast more than doubled due to an intra-regional shift in the regional property sample.this compromises our methodology for calculating standardized values, so we focus here on the and Pacific Northwest.) Our market value estimates for standardized timberland properties changed little from Q4 2. Market values fell.6 percent in the and increased.1 percent in the Pacific Northwest. These minor changes in timberland market values are consistent with stability in both timber prices and discount rates during the year. Per Acre Value of Fully Regulated Properties $3, $2,5 $2, $1,5 $1, Chart 3: Timberland Market Values $5 PNW Source: HTRG analysis Examining timber prices in Q4 23 compared to Q4 2 in Figures 1 and 4 on pages 3 and 4 show a slight downward movement in prices in the Pacific Northwest and flat prices in the. Capitalization rates calculated from our fully regulated forest valuation model increased by 14 basis points in the and remained flat in the Pacific Northwest. 1% 8% 6% 4% 2% Chart 4: Timberland Capitalization Rates Capitalization Rates for Fully Regulated Properties PNW Source: HTRG analysis continued on page 6 2 Hancock Timberland Investor Fourth Quarter 23

3 Quarterly Average Regional Composite Prices for Softwood Sawtimber Stumpage (US$ per MBF) $1, $8 $6 $4 $2 U.S. Pacific Northwest Export U.S. Pacific Northwest Domestic U.S. U.S. Northeast New Zealand Export Sources: Log Lines, Timber Mart-, New Zealand Ministry of Forestry and HTRG analysis Figure 1. Softwood Sawtimber Stumpage Prices Prices in Pacific Rim markets for sawtimber rose sharply fourth quarter as seen in both our Pacific Northwest export price and our New Zealand radiata pine price. Pacific Northwest export prices gained back most of the year s losses as prices rose over 3 percent. New Zealand radiata pine sawtimber prices also finished the year at levels similar to those posted earlier in the year. Sawtimber prices in the U.S. remained stable as they have all year. Quarterly Average Prices for U.S. Lumber and Sawlogs ($ per MBF - lumber scale) $6 $5 $4 $3 $2 $1 ern Pine (Westside), Kiln Dried, 2x4 #2, Random Length Lumber ern Pine Sawlogs Sources: Random Lengths and Timber Mart- ern Pine Chip-n-Saw Logs Figure 2. Lumber and Sawlog Prices in the U.S. ern pine lumber prices were up 2 percent over third quarter levels, reaching $4 per MBF a level not seen since late in 19. However, delivered southern pine log prices for both sawtimber size logs and smaller chip-n-saw size logs remained at or slightly below last quarter s prices. Coming quarters will tell whether southern pine timber prices will eventually respond to higher lumber prices with a lag or not at all. Quarterly Average Prices for U.S. Pacific Northwest Lumber and Sawlogs ($ per MBF - lumber scale) $5 $4 $3 $2 Figure 3. Lumber and Sawlog Prices in the U.S. Pacific Northwest Delivered Douglas-fir and whitewood log prices remained relatively flat fourth quarter as lumber prices in the Pacific Northwest retreated after last quarter s runup. Fourth quarter Douglas-fir lumber (green) averaged $311 per MBF (a $4 decline from last quarter) and hem-fir lumber (kiln-dried) averaged $2 per MBF (only a $4 decline). $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 Fourth Quarter 23 3

4 Quarterly Average Regional Composite Prices for Softwood Pulpwood Stumpage ($ per ton) $4 $35 $3 $25 $2 $15 $1 $5 $-5 U.S. Pacific Northwest U.S. Northeast U.S. Sources: Log Lines, Timber Mart- and HTRG analysis Figure 4. Softwood Pulpwood Stumpage Prices Fourth quarter pulpwood stumpage prices remained at historically low levels in all U.S. regions. $-1 Quarterly Average Prices for Market Pulp ($ per metric ton) and U.S. Pulp Logs ($ per 1 tons) $9 $8 $7 $6 $5 $4 NBSK List Price Douglas-fir Pulp Logs Figure 5. Market Pulp and U.S. Pulp Log Prices Market pulp prices moved to higher levels fourth quarterrising to values not seen since early in 2. Prices for delivered pulp logs drifted lower last quarter. However, both market pulp and pulp log prices have trended upward over the past two years. $3 $2 $1 ern Pine Pulp Logs Sources: FOEX Industries Ltd, Log Lines and Timber Mart- Quarterly U.S. Timberland Values ($ per acre) $2,5 $2, $1,5 $1, $5 87 Source: NCREIF Pacific Northwest Figure 6. U.S. Timberland Values in Private Property Markets Private timberland values rose across the United States fourth quarter, with southern timberland values up $22 per acre and Pacific Northwest timberland values up $8 per acre.there was a large shift in the NCREIF sample of properties in the Northeast last quarter from the New England states (per-acre values about $3) to the Alleghany region of Pennsylvania and southern New York (per-acre values about $3,).This caused the reported per-acre value of timberland in the region to more than double.as a result, we ve dropped the Northeast region from our timberland value chart. 4 Hancock Timberland Investor Fourth Quarter 23

5 Quarterly EBITDDA Multiples for Privately Traded Timberland (trailing 4-quarter EBITDDA) Figure 7. U.S. Timberland Valuation Multiples in Private Property Markets Steady earnings and rising timberland market values boosted both and Pacific Northwest price-toearnings multiples upward fourth quarter.the shift in the sample of NCREIF properties in the Northeast described in our note to Figure 6 confounds the calculation of a regional earnings multiple and has caused us to remove the Northeast from Figure 7 as well. 1 Pacific Northwest Sources: NCREIF and HTRG analysis Monthly Securitized Timberland Share Value (Indexed to 1 at start date) Index 8 Rayonier Plum Creek 6 Crown Pacific U.S. Timberlands 4 The Timber Company Deltic 2 TimberWest Source: HTRG analysis 12/ 12/ 12/ 12/ 12/ 12/ 12/ 12/ 12/ Figure 8. Hancock Securitized Timberland Index Share prices of public timber companies generally rose during the fourth quarter. Our Hancock Securitized Timberland Index increased by nearly 15 percent between September and December of 23.The S&P 5 Index rose by about 12 percent over this same period. Quarterly U.S. Timberland Values ($ per acre) $1,2 $1, $8 $6 $4 Private Property Market Public Equity Market Figure 9. U.S. Timberland Values in Public Equity and Private Property Markets Our estimate of southern timberland value in public markets rose by about 8 percent during the fourth quarter from $822 to $888 per acre. Private market values increased by only 2 percent, to $1,79 per acre. The private market premium fell from 29 percent to 22 percent. $2 Sources: NCREIF and HTRG analysis Hancock Timberland Investor Fourth Quarter 23 5

6 23 Timberland Investment Performance continued This stability in cap rates for timberland properties contrasts sharply with the substantial declines in cap rates observed during the past two years in markets for commercial real estate properties. Over the past two years, our estimates of timberland cap rates have risen by about 5 basis points. Commercial cap rates have fallen by 1-2 basis points during this same period. Absent changes in timberland property values, we conclude that the primary driver of timberland returns during 23 was physical timber growth. About half of this growth was captured via timber harvests. The remainder was realized via appreciation in timberland property values. 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 Forest Economist maronow@hnrg.com Timothy Fritzinger Financial Analyst tfritzinger@hnrg.com Hancock Timber Resource Group is a division of Hancock Natural Resource Group, Inc., a registered investment adviser and wholly owned subsidiary of John Hancock Financial Services, Inc. 24 Hancock Natural Resource Group, Inc. Figure 1. The composite price for southern sawtimber is based on quarterly average Timber Mart- 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- 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- 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. ern pine pulp log prices published by Timber Mart-. Pacific Northwest Douglas-fir pulp log prices published by Log Lines. Pulp log prices expressed in multiples of 1 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 ern 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

Hancock Timberland Investor

Hancock Timberland Investor Fourth Quarter 2006 2006 Timberland Investment Performance Despite the downturn in demand for housing and associated manufactured wood products, U.S. timberland properties in