Analysis of Timberland Transactions Reveals Size Discount

Transcription

1 Hancock Hancock Timber Resource Group Timberland Investor Third Quarter 19 Analysis of Timberland Transactions Reveals Size Discount Conventional wisdom has long held that there is an inverse relationship between the per-acre sales price and the size of timberland properties. This relationship, known as the wholesale discount, reflects the thicker markets for smaller parcels as well as their typically higher transaction costs. HTRG takes advantage of this phenomenon by purchasing large properties and selling small ones. We believe that this strategy might add as much as 100 basis points of annual return for our investors. As a consequence, we are always alert for opportunities to quantify the size of this effect. The current flurry of timberland changing hands over the last year provides some useful data to test this conventional wisdom. The chart below plots timberland transactions, which closed or are anticipated to close in 19, in the three key timber-producing regions of the United States (Pacific Northwest, and ). Anecdotal observation of the chart suggests that the wholesale discount is indeed reflected in these transactions. Statistical analysis of these data finds that a 1.0 percent increase in the size of the transaction reduced the per-acre acquisition cost by 0.20 percent (see Notes on page 6 for more complete statistical results). factors that, in combination, may be responsible for the wholesale effect. First, the possibility of land-use conversion to homesites, recreational acreage or farmland adds a larger premium to the per-acre price of small timberland properties than to large ones. Second, large timberland parcels are less liquid than small tracts. There are two principal sources of illiquidity for large timberland ownerships. One, both 19 U.S. Timberland Transactions $/acre $10,000 $1,000 economic and regulatory considerations dictate that the harvest of existing merchantable timber on a large property must be spread over a longer period of time than the harvest of merchantable timber on a small ownership. Harvest revenues expected at distant periods must be discounted. Also, timber prices are less certain in the future than in the present. Both of these factors reduce the value of merchantable timber on large holdings. continued on page 2 Why does the per-acre price of timberland property decrease with property size? There are several Source: HTRG analysis $ ,000 10, ,000 1,000,000 Transaction Size (acres) Hancock Timber Resource Group High Street, Boston, MA

2 Timberland Transactions Reveal Size Discount continued Two, the market for timberland thins as the sale acreage increases. Fewer buyers have access to the capital needed to purchase large timberland tracts. Larger transactions frequently require complex deal structures to accommodate sellers tax circumstances or to facilitate the use of leverage, and deal complexity reduces the number of potential purchasers. Fewer potential buyers put less pressure on prices of large timberland properties. Also, if sellers of large parcels are impatient, it is less likely that they will encounter the buyer who is willing to pay top dollar for the property. Given that a wholesale discount exists, why do owners sell their large acreage intact? Why don t they simply divide their large properties and sell the individual pieces for a higher total price? The probable answer is that the process of division and sale is not without cost, and that there are often benefits to selling large properties that are not reflected in the purchase price. We are preparing a more comprehensive Research Report on the wholesale discount let us know if you d like to receive a copy. Selected 19 Timberland Transactions (closed or anticipated to close) Buyer Seller Price (mil. $) Acres $/Acre U.S. The Conservation Fund Champion International $76.2 2,249 $257 Clayton Lake Woodlands International Paper $ ,000 $204 Inexcon Bowater $ ,000 $158 McDonald Investment Co. The Timber Company $ ,000 $116 The Nature Conservancy International Paper $ ,000 $189 McDonald Investment Co. Bowater $ ,000 $236 J.D. Irving Bowater $ ,000,000 $216 Forestland Group Champion $ ,000 $1 U.S. Sierra Pacific Industries Louisiana-Pacific $ ,000 $1,316 The Nature Conservancy Plum Creek $9.0 4,700 $1,5 The Nature Conservancy Hancock Timber Resource Group $ $3,165 Trust for Public Land Crown Pacific Partners LP $3.5 2,300 $1,522 U.S. Timberlands Boise Cascade $ ,000 $1,071 Crown Pacific Partners LP Plum Creek $73.0,000 $802 Hawthorne Timber Company, LLC The Timber Company $3.0 1,000 $2,046 U.S. Forest Investment Associates Gilman $ ,000 $1,453 Hancock Timber Resource Group Alliance Forest Products $ ,000 $752 Wachovia Timberland Investment Bowater $ ,000 $1,226 Rayonier Smurfit-Stone $ ,000 $733 Virginia Forest Investments Bear Island $ ,434 $1 Joshua Management, LLC Kimberly-Clark $ ,000 $870 The Nature Conservancy St. Joe Company $9.9 13,300 $744 The Nature Conservancy Plum Creek $8.7 4,750 $1,832 Forest Systems, LLC Packaging Corp. of America $ ,000 $836 Wachovia Timberland Investment Virginia Forest Investments $ ,371 $1,204 Wachovia Timberland Investment Virginia Forest Investments $ ,651 $1,162 Alabama Dept. of Conservation & Natural Resources Kimberly-Clark $ ,734 $6 Hancock Timber Resource Group Chesapeake $ ,000 $653 New Forestry LLC Virginia Forest Investments $45.5 8,041 $1,300 Wachovia Timberland Investment The Timber Company $ ,428 $1,107 Other RII/Weyerhaeuser World Timberfund, LP (Australia) CSR $.0 62,500 $1,568 Government of New Brunswick (New Brunswick) The Timber Company $41.0 3,000 $105 Champion International (U.S. North Central) Lake Superior $ ,000 $415 State of Wisconsin (U.S. North Central) Packaging Corp. of America $ ,000 $781 Evergreen (New Zealand) Carter Holt Harvey $11.8 7,840 $1,4 This information was compiled by HTRG research staff from the best available information on selected transactions. The listed party may be the timberland manager of the buyer/seller. 2 Hancock Timberland Investor Third Quarter 19

3 Timberland Investment Performance Indexed: 14(1)=1 2.0 Securitized Timberland (MLP/REIT) NCREIF All-Region S&P Forest Products Index Securitized Timberland (Total) 1.5 Figure 7. Quarterly returns for privately traded and publicly traded timberland Neither private timberland equity nor our estimates of publicly traded securitized timberland suffered the sharp downward correction reflected in the S&P Forest Products Index during the third quarter. 1.0 Source: NCREIF, Ibbotson and HTRG analysis 0.5 Securitized Timberland Performance Indexed: 14(1)=1 160 Deltic 150 Crown Pacific Plum Creek 140 U.S. Timberlands 130 The Timber Company Index Figure 8. The Hancock Securitized Timberland Index (HSTI) The 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 five publicly-traded timber-intensive forest products companies. Except for U.S. Timberlands, the companies appear to have tracked one another reasonably well, though their performance has been lackluster. The HSTI has increased just 1.5 percent per year since the beginning of 14. Even at its peak in 3Q 19, the annualized increase was only 5.6 percent /1/ 4/1/ Source: HTRG analysis 7/1/ 10/1/ 1/1/ 4/1/ 7/1/ 10/1/ 1/1/ 4/1/ 7/1/ 10/1/ 1/1/ 4/1/ 7/1/ 10/1/ 1/1/ 4/1/ 7/1/ 10/1/ 1/1/ 4/1/ 7/1/ 10/1/ Hancock Timberland Investor Third Quarter 19 5

4 Quarterly Average Regional Composite Prices: Softwood Sawtimber Stumpage US$ per MBF $1,000 $800 $600 $400 Export Domestic New Zealand Export Figure 1. Regional softwood sawtimber stumpage composite prices Continued strong domestic demand for processed products sustained sawtimber prices at high levels in the Pacific Northwest and. Export markets for Douglas-fir logs remained relatively soft despite stabilizing Japanese markets. Many producers in the continue to divert export grade logs into the relatively strong domestic market. $200 $0 Source: Log Lines, Timber Mart-, New Zealand Ministry of Forestry and HTRG analysis Quarterly Average Regional Composite Prices: Softwood Pulpwood Stumpage Per Ton $40 $35 $30 $25 $20 $15 Figure 2. Regional softwood pulpwood stumpage composite prices Relatively weak conditions in pulp and paper markets combined with ample supplies of pulpwood stumpage continued to depress prices during the third quarter. However, a nascent recovery in pulp and paper markets leads many industry observers to conclude that pulpwood stumpage prices have most likely bottomed. $10 $5 $0 Source: Log Lines, Timber Mart- and HTRG analysis Regional Timberland Values Per Acre $2500 $2000 $1500 Figure 3. Regional timberland values Timberland values in the and were little changed from last quarter. In the, a large increase in reported timberland values in Pennsylvania contributed to the 26 percent rise in our measure of regional value. $1000 $500 Source: NCREIF $ Hancock Timberland Investor Third Quarter 19 3

5 Timberland Enterprise Value per ern Equivalent Acre Per Acre $1200 $1000 $800 $600 $400 Timberland Enterprise Value/ ern Equivalent Acre (MLP/REIT) Timberland Enterprise Value/ ern Equivalent Acre (Total) NCREIF ern Timberland Index Figure 4. Two measures of timberland value Our estimate of the value of securitized timberland traded in both the MLP/REIT Index and the Total Index dropped just over 3 percent. Private market valuations were relatively unchanged from second quarter levels. The gap between our estimated private market and public market timberland values has widened. If public market values lead private market values, as is the conventional wisdom for commercial real estate, then we would expect that private market values will decline to narrow the gap. Source: NCREIF and HTRG analysis $200 EBITDDA Multiples for Privately Traded Timberland Source: NCREIF Figure 5. Ratio of market value to EBITDDA for private equity timberland EBITDDA (earnings before interest, taxes, depreciation, depletion and amortization) multiples for privately traded timberland rose in the and and fell slightly in the during the third quarter. Pricing multiples appear to be extraordinarily high in the and. In the, timberland markets are valuing the future cash flows to be produced by the large areas of pre-merchantable pine plantations found on many southern timberland properties. A very high market value reported for timberland in Pennsylvania is responsible for the result. Timberland Investment Performance Indexed: 10(1)=1 8 NCREIF NCREIF All-Region 7 S&P 500 Index NCREIF 6 NCREIF S&P Forest Products Index 5 T-Bill 4 3 Figure 6. Quarterly returns for timberland and selected financial assets During the third quarter, privately traded timberland made up some of the ground it had lost in recent years to the stock market. A reported 23 percent quarterly return in the (again, a large increase in the reported market value of timber in Pennsylvania) was largely responsible for the slightly positive return for the total NCREIF All-Region Timberland Index. 2 1 Source: NCREIF, Ibbotson and HTRG analysis 0 4 Hancock Timberland Investor Third Quarter 19

6 Research Team Clark S. Binkley, Ph.D. Chief Investment Officer Courtland L. Washburn, Ph.D. Director of Economic Research & Investment Strategy Mary Ellen Aronow Forest Economist Timo Fritzinger Financial Analyst Notes: Cover. Timberland transactions were estimated by the equation: ln (V) = α - β 1 * ln(a) +β 2 (1 if, 0 otherwise) +β 3 (1 if, 0 otherwise) + ε, where V = value in dollars/acre; A = property size in acres; α, β = regression parameters; ε = error term. Dummy variables were used to isolate the individual regions. # of observations α β 1 β 2 β 3 R standard errors in parenthesis (0.424) (0.038) (0.175) (0.165) 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. 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 prices are based on New Zealand Ministry of Forestry quarterly average published prices for Radiata unpruned A-sort export logs with internal analysis of logging costs for stumpage calculations. sawtimber prices are calculated from internal analysis. Figure 2. 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, and HTRG analysis of Spruce/Fir pulpwood in the. Figure 3. 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. Due to the small sample of property in the in 17 and 17 Q2, these values were backcast from 17 Q3 with quarter-end appreciation returns. Figure 4. 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. SEV 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. Figure 5. EBITDDA multiples are calculated using NCREIF timberland value per acre at quarter end divided by a trailing four-quarter annual average NCREIF net income per acre. Figure 6. Total quarter-end returns to timberland based on the NCREIF database. returns prior to 14 are based on the John Hancock Timber Index. Ibbotson Assoc. database was used for S&P 500, U.S. T-Bill and S&P Forest Products quarter-end returns (dividends reinvested). Figure 7. Total quarter-end returns to securitized timberland based on internal analysis. The Total Securitized Timberland Index includes Plum Creek (PCL), Crown Pacific (CRO), U.S. Timberlands (TIMBZ), Deltic (DEL) and The Timber Company (TGP). The MLP/REIT Securitized Index includes PCL, CRO and TIMBZ (dividends reinvested). Figure 8. The 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 five 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. 6 Hancock Timber Resource Group High Street, Boston, MA