An MFC Global Investment Management Company Timberland Investor Third Quarter 2005

Transcription

1 Hancock An MFC Global Investment Management Company Timberland Investor Third Quarter 25 Hurricane Effects on Timber Markets Confirming the Case for Diversification Hurricane damage is estimated to be 0.3 percent of the combined asset value of HTRG-managed properties. A portion of this damaged timber is expected to be salvaged, yet at prices below pre-hurricane levels. The U.S. Forest Service estimates timber damage as a result of Hurricane Katrina in August 25 to be 4.2 billion cubic feet, spread over five million acres in Mississippi, Alabama and Louisiana. Hurricane Rita, following twenty-six days later on September 24, damaged an estimated 771 thousand acres of timber, primarily in Texas, valued at $833 million.the total value of timber damaged and affected by the two storms is estimated to be in excess of $1 billion. Prior research has measured the price responsiveness of timber markets to large-scale natural disasters (Prestemon and Holmes 18, 20, Prestemon 24). A sudden reduction to the growing stock of timber disrupts the supply of timber coming into the market days and months following the event.this disruption in the flow of timber into the market has been hypothesized to result in both short and long-term price shifts. It is widely understood that due to the long time horizon it takes to grow trees, if there is a sudden reduction in the growing stock of The random, but periodic loss of timber value due to damage from natural events such as hurricanes, fire, insect and disease underline the benefit of geographically diversified timber portfolios. trees of a sufficient magnitude, a price shift can occur (Holmes 11, Prestemon and Holmes 20). What is less understood is given this reduction in supply, does the value of the remaining growing stock of trees shift to a new, higher level and is this level permanent (at least until new supply grows to fill the gap). Hurricane Hugo, a Category IV hurricane, damaged approximately 20% of the standing timber in the South Carolina coastal plain in the Fall of 19. Analysis of the market effects resulting from Hurricane Hugo has been mixed (Prestemon and Holmes 18, Prestemon 24,Yin and Newman 19).There is agreement on the initial response of falling prices in both pulpwood and sawtimber markets as large volumes of damaged timber moved into the market in a relatively short period of time following the hurricane.this behavior has occurred following most catastrophic forest damage. Damaged timber has a decreasing opportunity cost and owners quickly move to liquidate inventory which can cause a supply pulse (too much supply) and lead to a price drop (Holmes 11). continued on page 2 Hancock Timber Resource Group High Street, Boston, MA

2 Hurricane Effects on Timber Markets Confirming the Case for Diversification continued There is less agreement on the longterm price effects from this initial reduction in supply such like that from Hurricane Hugo. Some studies show there may be a persistent price increase following such an event most notable in geographic areas where markets tend to be thin (Prestemon 24). Other analyses have concluded that prices reverted to pre-hurricane levels after the initial price decrease (Yin and Newman 19). Logic would tend to favor the latter response unless the damage to the forest inventory was significant enough to elicit a change in regional demand. For the areas of the Gulf states affected by Hurricanes Katrina and Rita, we would expect downward pressure on prices due to an initial increase in the supply of timber on the market as salvage efforts were underway. Once the salvaged timber has mostly moved through the market, we would expect prices for the remaining inventory of trees to revert back to pre-hurricane levels in areas where markets are well developed. The random, but periodic loss of timber value due to damage from natural events such as hurricanes, fire, insect and disease underline the benefit of geographically diversified timber portfolios.while certain timberland properties managed by Hancock Timber Resource Group suffered damage from these two hurricanes, the impact on the total timberland assets under management by HTRG is negligible. Hurricane damage was centered on a handful of HTRG-managed properties in the states of Mississippi, Louisiana and Alabama, with losses totaling an estimated 12 percent of the combined market value of these properties. Historically this is a sizable loss (see HTI 2Q 23). Broadening the scope to include the value of all HTRG s southern US properties, the damage as a percent of total value drops to slightly under 1.0 percent. Diversify further, to include all of HTRGmanaged timberland in North America, and the damage as a percent of assets under management is estimated to be less than one half of a percent, at 0.4 percent. On a global scale, these two hurricanes affected 0.3 percent of HTRG s world-wide timberland assets under management. Based on prior research and conventional thinking that local timber prices in the near-term following a disaster of this magnitude will fall, we estimate recovering over 10 percent of the total value of the damaged and down timber by actively marketing the salvaged wood. While it is not always possible to construct an internationally diversified portfolio for each investor, it is clear that even intraregional diversification can, and does, reduce risks associated with natural catastrophes such as the Gulf states hurricanes of 25. Literature Cited: Burch, J.R., R.C.Abt, G. Pacheco,T.B. Lander, and R.M. Sheffield. 13. Hurricane Hugo: Timber Inventory, Price and Welfare Effects for South Carolina. In: Hurricane Hugo: Recovering from Disaster Proceedings 72nd Annual Meeting and Regional Technical Conference,Appalachian Society of American Foresters, Greenville, SC, Jan pages Holmes,T.P. 11. Price & welfare effects of catastrophic forest damage from southern pine beetle epidemics. For. Sci. 37(June):5-16. Prestemon, J.P. and T.P. Holmes. 18. Effects of Hurricane Hugo on South Carolina Timber Prices. In: Kluendar, R.A., M.M Corrigan, and N.B. Smith.The School of Forest Resources, University of Arkansas, Monticello,AR. Proceedings of the 17 Southern Forest Economics Workshop. Pages -1. Prestemon, J.P. and T.P. Holmes. 20. Timber price dynamics following a natural catastrophe.amer. J.Agr. Econ. 82(February): Prestemon, Jeffrey P. 24. Market dynamics and optimal timber salvage after a natural catastrophe. For. Sci 50(April): Yin, R. and D.H. Newman. 19.An intervention analysis of Hurricane Hugo s effect on South Carolina s stumpage prices. Can. J. For. Res. 29: continued on page 6 2 Hancock Timberland Investor Third Quarter 25

3 Quarterly Average Regional Composite Prices for Softwood Sawtimber Stumpage (US$ per MBF) $1,0 $8 $6 $4 $2 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 Sawtimber stumpage prices were flat to falling in all markets third quarter, with New Zealand export prices dropping the most. Despite early quarter gains in wharfgate prices for most export grades of New Zealand radiata pine, by quarter s end, stumpage prices were down $10 per mbf from last quarter levels, averaging $167 per mbf. In the US South, hurricane salvage wood began to enter the market, putting downward pressure on prices. In the US West, stumpage prices for both export and domestic grades were flat to down slightly. Quarterly Average Prices for U.S. South Lumber and Sawlogs ($ 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 As hot weather in the South slowed lumber demand early on in the quarter, the rapid increase in lumber demand in the wake of hurricanes Katrina and Rita resulted in a $12 per mbf increase in southern pine 2x4 #2 (westside) average prices for the quarter. Southern pine delivered logs did not respond in kind, as prices remained flat for both sawlog and chip- n -saw size logs. Quarterly Average Prices for U.S. Pacific Northwest Lumber and Sawlogs ($ per MBF - lumber scale) $5 $4 $3 $2 Figure 3. Lumber and Sawlog Prices in the U.S. Pacific Northwest Lumber prices in the West fell third quarter, with green Douglas-fir 2x4s falling 3 percent and kiln-dried hemlock 2x4s dropping 11 percent over last quarter levels, to average $353 and $319 per mbf, respectively, for the quarter. Delivered log prices were mixed, as Douglas-fir fell $13 per mbf and hemlock increased to $184, an $8 rise over last quarter prices. $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 Third Quarter 25 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 Pulpwood stumpage prices declined.40 per ton in the South, to average $7.15 per ton, yet rose in the West to almost break-even levels. Still, pulpwood stumpage prices in the West remain below our estimates of harvest and haul costs. $-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 NBSK Market Price Douglas-fir Pulp Logs Figure 5. Market Pulp and U.S. Pulp Log Prices Softwood market pulp prices dropped $15 per ton third quarter from second quarter levels, averaging $583 per ton. Southern sawmill production remained high third quarter, resulting in large volumes of chips continuing to feed local pulp mills. Delivered southern pine log prices remained flat third quarter. $3 $2 $1 Southern Pine Pulp Logs Sources: FOEX Industries Ltd, Log Lines and Timber Mart-South 0 Quarterly U.S. Timberland Values ($ 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 values in the South dropped $30 per acre from last quarter levels, averaging $1,069 per acre third quarter. Pacific Northwest timberland values averaged $1,3 per acre third quarter, a $4 per acre decrease from second quarter levels. It is important to note that the majority of properties in the NCREIF Timberland Property Index are revalued at year-end, limiting the usefulness of third quarter market values Source: NCREIF 89 4 Hancock Timberland Investor Third Quarter 25

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 Trailing multiples to operating EBITDDA rose in the South and were relatively stable in the Pacific Northwest. In the South, an average third quarter 25 EDITDDA level replaced an unusually strong third quarter 24 level, which decreased the 4-quarter trailing average, making the multiple rise. 10 Sources: NCREIF and HTRG analysis 0 Monthly Securitized Timberland Share Value (Indexed to 1 at start date) Rayonier Plum Creek Crown Pacific U.S. Timberlands The Timber Company Deltic TimberWest Figure 8. Hancock Securitized Timberland Index Share prices rose for all four timber-focused public companies in our Index third quarter, bringing the overall Index up 7 percent from last quarter s average and 16 percent over averages a year ago. Plum Creek and Rayonier, which together make up over 85 percent of the Index, reported strong earnings third quarter. 80 Index 40 Source: HTRG analysis 0 12/ 12/ 12/ 12/ 12/ 12/ 12/ 12/ 12/ 12/ Quarterly U.S. South Timberland Values ($ per acre) $1,4 $1,2 $1,0 $8 $6 $4 $2 Private Property Market Public Equity Market Sources: NCREIF and HTRG analysis Figure 9. U.S. South Timberland Values in Public Equity and Private Property Markets The gap in market value between public and private timberland in the U.S. South widened further third quarter, reaching $178 per acre. Historically, private timberland values have remained above public values, with an average gap in value about $2 per acre. This trend reversed in the third quarter of 24, with public values climbing and private values remaining relatively flat.this quarter, public values reached $1,243 per acre, the second highest value recorded since 10. Hancock Timberland Investor Third Quarter 25 5

6 Hurricane Effects on Timber Markets Confirming the Case for Diversification continued Research Team NOTES: Courtland L. Washburn, Ph.D. Managing Director and Chief Investment Officer Robert W. Hagler Director of International Investment Strategies & Economic Research Mary Ellen Aronow Senior Forest Economist 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. 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 18Q4 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. 26 Hancock Natural Resource Group, Inc. 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