Hancock Timberland Investor

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1 Hancock Timberland Investor Third Quarter 23 How Large is the Investable Timberland Base in the United States? Investors often ask us to quantify the size of the investable timberland base. They wonder how much of the investable timberland universe is already held by financially motivated owners. Investors also want to know what contribution timberland makes to the total universe of U.S. investment opportunities. Our calculations show investable timberland to be just about 3 percent of possible U.S. real estate investments, or slightly less than 0.3 percent of the total universe of possible U.S. investments. Market Value of Investable Timberland in the United States The first step in our process to value the investable timberland base was to estimate the acreage of private timberland in the continental United States.We obtained estimates of private timberland acreage from the U.S. Forest Service 23 publication An Analysis of the Timber Situation in the United States: 12 to public ownership acres from our calculations. Next we estimated the proportion of private timberland acreage that is investable. Our primary criterion for investability was that acreage must be held in sufficiently large ownership units to allow for cost-efficient acquisition. We assume that all of the acreage in industrial ownership is investable. We also made assumptions on the percentage of non-industrial private ownership acreage to include in the investable universe. Our assumptions reflect the proportion of NIPF timberlands which we believe are of the quality, size and location to be considered investable timberland. continued on page 2 The U.S. Forest Service classifies timberland as land capable of producing at least 20 cubic feet of industrial wood per acre per year, and not withdrawn from timber production. Timberland acreage data are presented by ownership category for regions of the United States. Ownerships are categorized as industrial, non-industrial private (NIPF) and public. We excluded Table 1. U.S. Investable Timberland (million acres or billion $) Pacific Northeast & Other South Northwest Lake States Regions Total Industry Acreage NIPF Acreage (investable) NIPF Acreage (non-investable) Total Market Value $70.0 $30.9 $15.8 $6.5 $123.2 Source: NCREIF, USDA Forest Service, HTRG Research Hancock Timber Resource Group High Street, Boston, MA

2 How Large is the Investable Timberland Base in the United States? continued In the Pacific Northwest, we included 30 percent of the NIPF acres. In the South, Northeast and Lake States and other regions, we included 20 percent of the NIPF acreage. Lastly, we multiplied the acreage figures by estimates of current peracre market values for timberland in each region. We used third-quarter 23 per-acre values of the properties in the NCREIF Timberland Property Index in the South ($1,066), Pacific Northwest ($1,8), and Northeast & Lake States ($424). For other regions, we used a value of $1,0 per acre. Table 1 presents our results by geographic location and ownership category. The majority about 57 percent of the investable timberland base in the United States is located in the South.Another 25 percent is in the Pacific Northwest. The remainder is split between the Northeast & Lake States (13 percent) and other regions (5 percent). Institutional timberland is defined here as timberland managed by timberland investment advisory firms.this includes primarily timberland properties managed for tax-exempt institutions such as pension plans and university endowments, and taxable institutions such as insurance companies. It also includes timberland managed by advisory firms for high-net-worth individuals. We used a two-step process to estimate the magnitude of current institutional holdings. We began with the reported market value of the timberland properties in the NCREIF Timberland Property Index as of third-quarter 23. This amounts to $5.5 billion, located primarily in the South and Pacific Northwest. We added to these values our estimates of institutional timberland holdings that are not included in the NCREIF database. These include properties that are managed by NCREIF members but do not qualify for inclusion in the Index. They also include properties managed by firms that are not NCREIF members. This adds another $4 billion to the institutional ownership total. Results are presented in Table 2. We estimate that institutional investors currently hold about 8 percent of the investable timberland in the United States. Interestingly, this proportion is nearly equal in each of the three major timber-producing regions. Timberland as a Percentage of Investment Universe How does the size of the investable U.S. timberland base compare to the magnitude of the overall U.S. investment universe? Estimates of the total size of the U.S. investment universe of course vary. Prudential Real Estate Investors has estimated that the total is about $45 trillion. Stocks and bonds make up the lion s share of the market, each contributing about $15 trillion or one-third of the total. Real estate investments are estimated to be a little over $4 trillion or 9 percent of the total. continued on page 6 Institutional Ownership of U.S. Timberland What proportion of these investable timberlands is already owned by institutional investors? Table 2. Institutional Holdings of U.S. Timberland (billion $) Pacific Northeast & South Northwest Lake States Other Total NCREIF Database Properties $3.8 $ $5.5 Non-NCREIF Database Properties $1.6.8 $1.2.2 $3.8 Total Institutional Timberland $5.4 $2.4 $1.3.2 $9.2 Percent of Investable Timberland 7.7% 7.7% 8.1% 2.8% 7.5% Source: NCREIF, HTRG Research 2 Hancock Timberland Investor Third Quarter 23

3 Quarterly Average Regional Composite Prices for Softwood Sawtimber Stumpage (US$ per MBF) $1,0 $8 $6 $4 U.S. Pacific Northwest Export U.S. Pacific Northwest Domestic U.S. South U.S. Northeast New Zealand Export Sources: Log Lines, Timber Mart-South, New Zealand Ministry of Forestry and HTRG analysis Figure 1. Softwood Sawtimber Stumpage Prices Prices for sawtimber stumpage in U.S. domestic markets were relatively stable during the third quarter. Export prices in the U.S. Pacific Northwest moved up 17 percent over second quarter levels, however, due largely to the combined effect of a growing Japanese economy and a stronger yen. On the other hand, export prices for radiata pine in New Zealand fell by 18 percent. $2 Quarterly Average Prices for U.S. South Lumber and Sawlogs ($ per MBF - lumber scale) $6 $5 $4 $3 $2 $1 Southern Pine (Westside), Kiln Dried, 2x4 #2, Random Length Lumber Southern Pine Sawlogs Sources: Random Lengths and Timber Mart-South Southern Pine Chip-n-Saw Logs Figure 2. Lumber and Sawlog Prices in the U.S. South Southern pine lumber prices were up 17 percent over last quarter s level, bolstered by the combination of higher-than-expected demand for home construction, insufficient dealer inventories, and supply constraints due to wet weather. Delivered log prices in the South did not follow lumber prices upward, however. Quarterly Average Prices for U.S. Pacific Northwest Lumber and Sawlogs ($ per MBF - lumber scale) $5 $4 $3 $2 Figure 3. Lumber and Sawlog Prices in the U.S. Pacific Northwest Douglas-fir lumber prices also moved up sharply last quarter reaching $351 per MBF, a level not seen since 20. Prices for whitewood lumber increased substantially as well. As in the South, the strength in lumber markets had little effect on prices for delivered logs. Time will tell whether log markets eventually respond in a delayed fashion, or not at all. $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 23 3

4 Quarterly Average Regional Composite Prices for Softwood Pulpwood Stumpage ($ per ton) $40 $35 $30 $25 $20 $15 $10 $5 $-5 U.S. Pacific Northwest U.S. Northeast U.S. South Sources: Log Lines, Timber Mart-Southand HTRG analysis Figure 4. Softwood Pulpwood Stumpage Prices Average southern pine pulpwood stumpage prices have finally inched back up to the $7 per ton range a level we have not seen since 20. Pulpwood stumpage prices also rose in the Northeast third quarter. Delivered pulpwood prices in the Pacific Northwest continue to be below our estimate of average harvest and haul costs (currently $21 per ton), resulting in a negative stumpage value. $-10 Quarterly Average Prices for Market Pulp ($ per metric ton) and U.S. Pulp Logs ($ per 10 tons) $8 $7 $6 $5 $4 $3 NBSK List Price Douglas-fir Pulp Logs Figure 5. Market Pulp and U.S. Pulp Log Prices Third quarter market pulp prices remained near second quarter levels. Prices for delivered pulpwood inched upward. The chart suggests that Douglas-fir pulpwood values continue to be more volatile and responsive to conditions in pulp markets than values for southern pine pulpwood. $2 $1 0 Southern Pine Pulp Logs Sources: Pulpex, Log Lines and Timber Mart-South Quarterly U.S. Timberland Values ($ per acre) $2,5 $2,0 $1,5 $1,0 $5 Source: NCREIF Pacific Northwest South Northeast Figure 6. U.S. Timberland Values in Private Property Markets Timberland values were up in the Northeast third quarter, rising to $546 per acre, an increase of over $1 per acre. This is not reflective of changing market conditions, but rather is the result of a shift in the sample of Northeast properties in the NCREIF database from the lower-price New England states to the higher-price Alleghany region. Timberland values in the Pacific Northwest and South were down slightly.as many properties in the NCREIF database are not appraised until the fourth quarter, thirdquarter levels are not always fully representative of current market conditions. 4 Hancock Timberland Investor Third Quarter 23

5 Quarterly EBITDDA Multiples for Privately Traded Timberland (trailing 4-quarter EBITDDA) South Northeast Figure 7. U.S. Timberland Valuation Multiples in Private Property Markets The pricing multiple for privately traded timberland in the Northeast rose sharply third quarter as our fourquarter trailing income calculation dropped last year s unusually large third quarter value. Multiples in the South and Pacific Northwest were relatively stable. 10 Pacific Northwest Sources: NCREIF and HTRG analysis 0 Monthly Securitized Timberland Share Value (Indexed to 1 at start date) Index Figure 8. Hancock Securitized Timberland Index The Hancock Securitized Timberland Index rose by about 10 percent last quarter. The primary driver of this increase was Rayonier s announcement that the company planned to elect tax-advantaged REIT status, which propelled its share price upward Rayonier Plum Creek Crown Pacific U.S. Timberlands The Timber Company Deltic TimberWest Source: HTRG analysis 0 12/ 12/ 12/ 12/ 12/ 12/ 12/ 12/ Quarterly U.S. South Timberland Values ($ per acre) $1,2 $1,0 $8 $6 Private Property Market Public Equity Market Figure 9. U.S. South Timberland Values in Public Equity and Private Property Markets Timberland values in public equity markets also remained relatively stable last quarter. We estimate that public timber companies continue to trade at a 20 to 25 percent discount to the private market value of their timberland holdings. $4 $2 Sources: NCREIF and HTRG analysis Hancock Timberland Investor Third Quarter 23 5

6 How Large is the Investable Timberland Base in the United States? continued Timberland comprises a small Sources: fraction of the $45 billion. Typically, USDA Forest Service. February 23. An timberland fits within the real estate Analysis of the Timber Situation in the allocation of a diversified portfolio. United States: 12 to Pacific Northwest Research Station, Portland, Oregon. We estimate investable timberland General Technical Report PNW-GTR-560. to be about 3 percent of investable Prudential Real Estate Investors, July 21, real estate or 0.3 percent of the total Value and Stability Commercial Real U.S. investable universe. Figure 1 Estate in Diversified Portfolios. Parsippany, graphically displays market shares. NJ. 15 pages. Chart 1. $45 Trillion U.S. Investable Universe Stocks: 33.9% Real Estate: 9.0% Timberland: 0.3% Note: South includes Alabama,Arkansas, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, Oklahoma, South Carolina, Tennessee,Texas and Virginia. Northeast includes Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island,Vermont and West Virginia. Lake States includes Michigan, Minnesota, Wisconsin, North Dakota, eastern South Dakota (included in the Lake States for this analysis are the Plains States, which include Illinois, Indiana, Iowa, Kansas, Missouri, Nebraska and Ohio). Pacific Northwest includes Washington, Oregon, California and Hawaii. Other includes Idaho, Montana,Arizona, Colorado, Nevada, New Mexico, western South Dakota, Utah and Wyoming. Bonds: 33.9% Other: 22.9% Source: Prudential Real Estate Investors and HTRG Research Research Team 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. 23 Hancock Natural Resource Group, Inc. 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 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 Pulpex. 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. 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