Hancock Timberland Investor

Transcription

1 Hancock Timberland Investor Second Quarter 2006 Log Price Volatility as a Measure of Timberland Investment Risk Fluctuations in log prices are a key feature of any timberland investment, for log price variability represents a significant source of risk. When evaluating investment risk in new geographies, relative log price volatility provides an objective measure of one source of timberland investment risk. As timber investment managers expand their search for appropriate timberland investments outside of the United States, determining how to measure and compare the investment risks of a particular geography is paramount. The analysis is inhibited not only by the lack of metrics that fully capture the risks of international timberland investing, but also by the lack of good data in many countries with which to make meaningful comparisons. Arguably the most important variable impacting US dollar timberland returns for non-us investments is the volatility of local log prices in US dollar terms. A time series of log prices in US dollar terms captures both the volatility of the domestic market, as well as the volatility of that currency against the US dollar. In some instances, volatility in the local market can be mitigated by movements in currencies; in some instances, exacerbated by these same movements. Nevertheless, US dollar log price volatility remains a cornerstone of assessing international investment risks. At HTRG, this metric is combined with other factors such as a measure of local markets and overall investment risks, to fully Chart 1: Volatility of Log Prices for Selected World Regions Log Grade Pulpwood Sawlogs evaluate the risks of an international timberland investment. In recent work to evaluate the relative risks of investable geographies, we evaluated and compared the volatility of US dollardenominated log prices in several Percent Standard Deviation Source: HTRG Research U.S. South Chile New Zealand Australia U.S. Pacific Northwest Brazil Sweden South Africa (Continued on page 2) Hancock Timber Resource Group Second Quarter 2006

2 Log Price Volatility as a Measure of International Investment Risk (Continued from page 1) global regions. We calculated the volatility for major grades within each region (such as sawlogs, pulpwood, and veneer logs), weighted by their proportional value of a final harvest (to date, this analysis has only been applied to even-aged forests). This methodology correctly assigns volatility to each grade, in order to prevent typically more volatile pulpwood markets from disproportionately impacting the volatility of the entire forest. Pulpwood stumpage prices are historically more volatile than sawlog stumpage prices, due in part to the volatility of global market pulp prices, the crosssubsidized nature of pulpwood cost structures, and more concentrated markets (Chart 1). One method for calculating the weighted-average volatility for a world region is to sum the products of the proportional contribution to forest value of individual log grades and their volatility. This methodology is referred to as the weighted volatility and yields regional average volatilities ranging from 11 percent in the U.S. South to 72 percent in Argentina. The assumption underlying this methodology is a 1:1 movement in prices across all grades vis-avis market and currency conditions. Our investment experience in many regions outside of the U.S. contradicts this assumption. An alternative, and correct, method is to blend the results of each log grade on an annual basis, and then calculate the volatility of the blended price series (the blended volatility ). This permits price movements in any one grade to be amplified, or countered, by price movements in another grade. If log grade prices in a particular region are not well correlated, the grades within the region even within an individual tree act as mini-portfolios, thereby lowering the overall volatility of the market. It can be argued that forest managers will find it difficult to fully capitalize on dissimilar movements in log grades, as it remains a challenge to harvest only parts of a tree. However, timber sales that favor a particular log grade can be timed by an alert forest manager in order to take advantage of unrelated price movements, and some of this benefit can be captured by the investor. Percent Standard Deviation A comparison of the two methods for computing regional average log price volatility (weighted volatility versus blended volatility) clearly identifies world regions where this inter-log grade portfolio effect occurs. If log grade prices move together, the difference between the two measures of volatility will be minimal. It is clear that prices for log grades in New Zealand, Chile and South Africa are less correlated with each other than those of other selected world regions (Chart 2). The heavy export orientation of these markets could explain part of this phenomenon, as export and domestic markets are often driven by different dynamics. Nevertheless, the net result of these inter-log grade dynamics is to lower the overall Chart 2: Variance Between Methods for Calculating Regional Log Price Volatility Source: HTRG Research U.S. South Chile New Zealand Australia U.S. Pacific Northwest Coastal British Columbia Brazil Sweden South Africa Argentina (Continued on page 6) Hancock Timber Resource Group Second Quarter

3 Quarterly Average Regional Composite Prices for Softwood Sawtimber Stumpage (U.S.$ per MBF) $900 U.S. Pacific Northwest Export U.S. Pacific Northwest Domestic $800 New Zealand Export U.S. South U.S. Northeast $700 Sources: Log Lines, Timber Mart-South, New Zealand Ministry of Forestry and HTRG Analysis Figure 1. Softwood Sawtimber Stumpage Prices Softwood stumpage prices were level or higher for the second quarter, with the exception of prices for southern pine timber in the U.S., which dropped 8 percent from last quarter and 6 percent from year-ago levels. Dry weather into June throughout much of the South made for ample supply, placing downward pressure on prices. Regional stumpage prices in New Zealand and within the U.S. Northeast and Pacific Northwest continued an upward trend, with second quarter levels higher this year than the same period last year. Quarterly Average Prices for U.S. South Lumber and Sawlogs ($ per MBF lumber scale) Southern Pine Saw Logs Southern Pine (Westside), Kiln Dried, 2x4 #2, Random Length Lumber Southern Pine Chip-N-Saw Logs Figure 2. Lumber and Sawlog Prices in the U.S. South Regional lumber prices have responded to a slowdown in housing demand. Southern pine lumber prices as represented by Random Lengths Westside 2x4 price began falling in February of this year and has continued downward, with the second quarter average price of $351 per MBF a return to levels of mid-year Southern pine delivered logs remained strong second quarter despite lower prices for stumpage in the South as high fuel costs continue to hold delivered prices up. Sources: Random Lengths and Timber Mart-South Quarterly Average Prices for U.S. Pacific Northwest Lumber and Sawlogs ($ per MBF - lumber scale) Douglas Fir, Green 2x4 Lumber Hem-Fir (Coast), Kiln Dried, 2x4 Lumber Douglas-fir Sawlog Whitewood Sawlog Sources: Random Lengths and Log Lines Figure 3. Lumber and Sawlog Prices in the U.S. Pacific Northwest Lumber prices in the U.S. Pacific Northwest also fell second quarter, with average prices for green Douglasfir 2x4s at $312 per MBF and kiln-dried hemlock 2x4s at $329 per MBF. These West Coast lumber prices were down 7 percent, on average, from last quarter and over 14 percent lower than second quarter of last year for Douglas-fir, and 8 percent for hemlock. In contrast, delivered log prices for both Douglas-fir and hemlock rose this quarter, with second quarter average prices reaching similar levels as seen in the second quarter of last year. Hancock Timber Resource Group Second Quarter

4 Quarterly Average Regional Composite Prices Softwood Pulpwood Stumpage ($ per ton) $40 $35 $30 $25 $20 $15 U.S. Pacific Northwest U.S. Northeast U.S. South Figure 4. Softwood Pulpwood Stumpage Prices Regional pulpwood stumpage prices fell across the U.S. second quarter. Prices fell most notably in the South, as dry weather allowed unconstrained access to supply at the same time that many pulp and paper mills put quotas in place during summer maintenance downtime. $10 $5 -$5 Sources: Log Lines, Timber Mart-South and HTRG analysis -$10 Quarterly Average Prices for Market Pulp ($ per metric ton) and U.S. Pulp Logs ($ per 10 tons) $900 $800 $700 NBSK Market Price Douglas-fir Pulp Logs Figure 5. Market Pulp and U.S. Pulp Log Prices Market pulp prices as represented here by the price for Northern Bleached Softwood Kraft jumped up over $50 per ton second quarter, to $683 per ton, a high not reached since Delivered pulpwood prices held up by high fuel costs, moved little from last quarter despite the fall in pulpwood stumpage prices. Southern Pine Pulp Logs Sources: FOEX Industries Ltd., Log Lines and Timber Mart-South Quarterly U.S. Timberland Values ($ per acre) $2,500 $2,000 $1,500 $1,000 U.S. Pacific Northwest U.S. South Figure 6. U.S. Timberland Values in Private Property Markets Private timberland values in the U.S. South and Pacific Northwest rose by about $50 per acre second quarter from last-quarter levels. Note that year-end values are the best measure of timberland market values since the majority of the properties in the NCREIF database are valued at year-end as opposed to any other quarter during the year. Source: NCREIF Q1 Q1 Q1 Hancock Timber Resource Group Second Quarter

5 Quarterly EBITDDA Multiples for Privately Traded Timberland (trailing 4-quarter EBITDDA) U.S. South U.S. Pacific Northwest 10 5 Sources: NCREIF and HTRG Research Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Figure 7. U.S. Timberland Valuation Multiples in Private Property Markets Price-to-earnings multiples in both the U.S. South and Pacific Northwest rose second quarter. Timber income in the South, at $9.74 per acre, was not unlike income levels second quarter of last year, therefore the rise in southern timberland values for the quarter pushed the trailing 4-quarter EBITDDA up. In the Pacific Northwest, timber income second quarter was about $12 per acre less than income in the second quarter of last year. This drop in income was muted by a slight rise in Pacific Northwest timberland values, resulting in a small increase in the multiple for the quarter. Monthly Securitized Timberland Share Value (Indexed to 100 at start date) 320 Rayonier Plum Creek Crown Pacific Deltic 280 Timberwest U.S. Timberlands The Timber Company Index Source: HTRG Research 0 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Figure 8. Hancock Securitized Timberland Index The Hancock Securitized Timberland Index moved downward second quarter as weakening lumber markets resulted in poor performance for the two companies Plum Creek and Rayonier that make up the majority of our Index on a market capitalization-weighted basis. Alternatively, Timberwest, a small contributor to our overall Index, reported increased harvests of highervalued Douglas-fir species over western hemlock, and strong export sales to Japan helped buoy their performance second quarter. Quarterly U.S. South Timberland Values ($ per acre) $1,400 $1,200 $1,000 $800 Private Property Market Public Equity Market Figure 9. U.S. South Timberland Values in Public Equity and Private Property Markets Southern timberland values in public and private markets moved in opposite directions again second quarter. Values in public equity markets fell about $60 per acre to average $1,072 per acre for the quarter. Private timberland in the South rose $50 per acre from last quarter s level, averaging $1,210 per acre. Sources: NCREIF and HTRG Research Hancock Timber Resource Group Second Quarter

6 Log Price Volatility as a Measure of International Investment Risk (Continued from page 2) volatility of the regional market. A few conclusions that can be drawn from this analysis are that: Globally, pulpwood stumpage prices have been more volatile historically than sawlog stumpage prices. The low correlation of log grade prices within particular markets can significantly reduce (by as much as basis points) the overall volatility of the region. Evaluating the volatility of the blended log price series, that is based on the typical product mix of a representative harvest, permits price movements in any one grade to be amplified, or countered, by price movements in another grade. Research Team Courtland L. Washburn, Ph.D Managing Director and Chief Investment Officer cwashburn@hnrg.com Robert W. Hagler Director of International Investment Strategies & Economic Research bhagler@hnrg.com Mary Ellen Aronow Senior Forest Economist maronow@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 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 their 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 priced 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 their North American Lumber Forecast. Figure 4. Pulpwood composite prices are derived from quarterly average Timber Mart-South published prices for southern pine pulpwood 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 priced 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. Figure 7. EBITDDA multiples are calculated using NCREIF timberland value per acre at quarter end divided by 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 500) to calculate a market capitalization-weighted value for seven 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 timber-intensive 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 Second Quarter