Agadir, Morocco March 20 th 24 th, 2017 Floresta Atlântica Fund in Portugal: Partnership between Forestry and Agriculture for Sustainable Landscape Finance Carla Dias Wadewitz BBI & Catolica Lisbon School of Business and Economics (carlawadewitz@gmail.com)
Demand for timber and timber assets The timberland and forest management industry continues to grow as global demand rises and new uses for timber emerge 2
Demand for timber and timber assets World Timber Supply Forecast 2010 to 2020 2500 2000 (in million cubic meters) 1500 1000 500 Supply Demand 0 2010 2020 Source: UN-FAQ 3
Market Trends Timberland has shown a steady and overall high appreciation (low correlation with the economic cycles), representing the asset with the highest return since 1987 Source: International Woodland Company (IWC) 4
Market Trends The inclusion of timberland in a portfolio greatly improves the efficient frontier as, for a given level of risk, the return is usually always higher Source: International Woodland Company (IWC) 5
Why investing in Forestry in Portugal? Market Conditions Country Conditions Successful Investment Risk Management Partnerships 6
Why investing in Forestry in Portugal? Country Market High and easy accessibility (ports, airports) -> Easy to export Industries (pellets, pulp & paper, cork, packaging) Country Successful Investment Risk Management Portuguese eucalyptus globulus provides higher industrial paper/pulp productivity (+40%) than any other species Partnerships Available water resources and rain (in winter) Availability of land for acquisition and leasing 14% of forestry land is managed by forestry communities Pulp & paper industry units Land prices and labour costs are still relatively low Portuguese State and the EU provide a support to investment (non refundable subsidies up to an average of 75% of the invested value) Forestry activity enjoys significant tax benefits Future exit for the investors is easy 7
Why investing in Forestry in Portugal? Market Market High level of diversification of: (i) species and forest maturities; (ii) geographical location of assets; (iii) diversified product segments Country Successful Investment Risk Management High demand (big industrial clients) for wood products Increasing demand for raw materials Partnerships Easy to certificate Growth in co-combustion with biomass (cement companies, thermal power stations) High prices and highest EBITDAs worldwide Off-take agreements for the main products, at guaranteed price within a PBV of 15% relative to the highest market price 8
Portuguese Forest: Country & Market Conditions Solid and high consumption forest industry (pulp, panel, cork and sawmill) National high deficit (imports vs. exports) on roundwood, sawnwood, pulpwood, veneer logs and saw logs Low exportation costs, due to high proximity to other large european consumers markets Forest products external trade (tonnes) Major forest industry units at Spain and Portugal Source: Ministerio de Industria, Turismo y Comercio. Estadísticas de Comercio Exterior (2002-2007) Source: Natural Assets 9
Sweden Finland Portugal UK Norway Austria France Spain Ireland Germany Portuguese Forest: Country & Market Conditions Iberian businesses are represented the forestry industry internationally with some of the most prominent European companies in the sector. There are six Iberian companies among the Top 100 largest companies in the world, of which 29 are European. 22.1 7 Major European players by country, 2012 ( Companies in the world top 100) Revenue, 2009 (USD million) 35.4 5.0 4 4 12.7 6.6 3 4.3 3 5.5 2 2 2 2 9.4 0.5 1 1 Source: PricewaterhouseCoopers 10
Thousand hectares Source: Forest Resources Assessment 2010 (FAO, 2010) Portuguese Forest: Country & Market Conditions More than 98% of the forest total area belongs to private owners (FAO, 2010), providing good acquisition opportunities. Portugal s forest land can be acquired at relatively low prices, when compared to other European countries. Forest area according ownership 3500 3000 88,0% 2500 2000 1500 1000 Public Private 500 1,6% 5,2% 5,1% 0 Public ownership Private owned by individuals Private owned by business entities and institutions Private owned by local communities 11
Portuguese Forest: Country & Market Conditions Property acquisition costs Transaction tax : Urban 6.5%; Rural 5.0% Municipal tax 0.8% Total tax for acquisition of rural properties 5,8% of the acquisition cost Notary and registration <21 /hectare Total cost per acquisition - <6,3% of the acquisition cost Company taxes Company income tax 21.00% (2017) Timberland Funds based in Portugal Full Exemption of income taxes 10% over the dividends of Fund investors Forest Grants (CAP of 5M /SPV) Average: 50% of all installation, including infrastructures, excluding short rotation plantation; Average: 30% of infrastructures costs for short rotation species (<20 years) 12
Floresta Atlântica Fund: Investment Mission Business Floresta Atlântica Fund ( 20 Million) was launched in October 2007 and it s main purpose is to promote sustainable forestry development through the commitment of private initiative. Use forestry management mechanisms to achieve efficiency and profitability targets. Anchor properties and local nucleus for risk management. Promote partnerships, including public-private, as an innovative business model to foster sustainable forestry management. Shareholders Instituto de Financiamento da Agricultura e Pescas (40,5%); 5 Private shareholders (59,5%). 13
Floresta Atlântica Fund: Investment Land Use Bush 3% Chestnut 3% Agricultural 5% Cork oak 3% Walnut 3% Cypress 2% Other 1% Quercus Ilex 5% Oaks 6% Maritime pine 51% Eucalyptus and other hardwood 8% Other land uses 9% 14
Floresta Atlântica Fund: Investment Policy Investment Policy - Diversification The production and exploration of the forest, based on replanting new stands and the management of existing stands, with special emphasis placed on some species Tourism-based entertainment and activity related to Nature Tourism, Cultural Tourism in the rural setting, and open-air sports & activities Forestry by products useful for forestry industries and biomass combustion industries Promoting the production and exploration of all the woodland resources growing/ava ilable in all the properties Rental of areas for use to others, which does not come in conflict with forest and forest management use (e.g. wind and solar parks) 15
Floresta Atlântica Fund: Investment - more than 460 properties - GFS certification by FSC and PEFC systems - joining the WWF Global Forest & Trade Network - Certification of organic production - 23 tree species and 10 segments of wood products - 5 kinds of dry fruits (Chestnut, Walnut, Almond, Hazelnuts, Pine Nuts) - 6 bee products (mostly honey related) - 14 mushroom species - other products (carqueija flower, wild cherry, arbutus, blackberries) - Leases from Renewable energy players - Leases for fruits trees and aromatic herbs plantations - Leases from pastures -Leases from corn plantations 16
Why investing in Forestry in Portugal? Partnerships Market Communities Local authorities Country Successful Investment Risk Management Local and national forest organizations Scientific organizations Partnerships Local agents Certification agencies 17
Floresta Atlântica Fund: Investment 18
Floresta Atlântica Fund: Partnerships Local agents: Land acquisition Service suppliers Fire fighting Product sale Local Communities: Jobs Services suppliers Fire fighting Properties cleaning Floresta Atlântica Local authorities: Land acquisition and titles Administrative paperwork Certification entities (ex: GFS): Certifications (individual, group, community) Scientific community Research (species, climate, IT systems) Fire risk management 19
Floresta Atlântica Fund: Partnerships Partnerships with all 60 forestry organisations Transactions were made (purchases and leases) with 377 forest owners over 87% of which have properties area below the economically viable minimum size Long-term lease contracts were made with 7 governing boards of wastelands and parish councils representing about 3,800 counterparts. These communities will receive by 2018 about 1.7 million in rent and labor Operating expenses 2008-2018 (forest management, operational managers, firemen, technical support) in the estimated amount of about 20.7 million, mainly locally hired 20
Floresta Atlântica Fund: Partnerships 21
Why investing in Forestry in Portugal? Risk Management Market Communities are integrated in forestry and contribute for sustainability Development of an effective Risk Management Model that combines the Country Successful Investment Risk Management management of systemic risks (price and demand pattern) and nonsystemic risks (fire, pests and diseases) Product diversification - non wood products cork, resin, fruits, honey Partnerships products, hunting, eco-tourism, mushrooms - are able to pay the forest management costs and the costs of preserving conservation areas for the sustainable forest management standards certification demanded by the industry Partial transfer of forest fire risk to a third party, through the purchase of forest insurance 22
Floresta Atlântica Fund: Product Diversification 23
Floresta Atlântica Fund: Product Diversification 24
Floresta Atlântica Fund: MIS Management Information System Int Graal WinForest is a modular information management system that has been tailor made for Floresta Atlântica. This system allows for an efficient management of the agriculture and forestry assets, optimizing operations and maximizing the return from this sustainable investment. The basis and support of this system is a geographical information and data management platform. This information is fundamental for the management of the agriculture and forestry assets and is also compliant with the most demanding auditing and certification criteria. 25
Floresta Atlântica Fund: MIS Investor access The system can be accessed remotely. There is a 3 stage authentication process, corresponding to 3 different passwords. The access to the information is configured in order to guarantee its integrity and confidentiality. Step1 Access through a dedicated desktop connection Step 4 Selection of the geographical location Step 2 First control level Step 3 Second control level 26
Floresta Atlântica Fund: MIS Type of Plantation 27
Floresta Atlântica Fund: MIS Type of Elevation 28
Floresta Atlântica Fund: MIS Average Temperature 29
Floresta Atlântica Fund: MIS Types of properties and fuel 30
Floresta Atlântica Fund: MIS Fire Risk Map 31
Soil Elevation Fire frequency 1975-2007 Floresta Atlântica Fund: MIS The final evaluation of forest fire hazard is through the integration of two key elements: fire history and potential propagation. Integrated risk assessment of forestry fire 32
Floresta Atlântica Fund: Systemic Risks Analysis London agency that identifies, quantifies, models and finally prices risk within forestry investments due to natural hazards such as fire, windstorm, flood, snow and many others. This is for international reinsurers, companies and governments worldwide. The forensic attention to fire risk as demonstrated in the Floresta Atlântica (FA) phased approach has not been seen in the forest investment sector in the 25 years experience of staff within ForestRe. Overall Assessment by ForestRe: This is an incredibly sound approach, for Portugal is one of the most forest-fire prone countries. ForestRe have no hesitation in recommending the pre-purchase risk analysis procedures utilised by FA through their consultants; and furthermore in the experience of ForestRe it is without equal in the forest investment sector anywhere is the world. 33
Floresta Atlântica Fund: Product Diversification Eucalyptus globulus - plantation Revenues - land 14,000 Revenues - wood 9,000 Harvesting costs Maintenance costs 4,000 Instalation costs -1,000 0 1 2 3 4 5 10 15 20 Insurance Managment costs -6,000 Land Acquisition Average mill price: 50-55 /m 3 (FSC) Greenfield 20 years rotation (2 cycles) MAI 18 m3/ha/year Products wood Before grants and non wood products Year 0 1 2 3 4 5 10 15 20 Average Total Land Acquisition -2 500 0 0 0 0 0 0 0 0-119 -2 500 Management costs -42-42 -43-43 -44-44 -46-49 -51-46 -976 Insurance -20-20 -20-21 -21-21 -22-23 -24-22 -465 Installation costs -1 350 0 0 0 0 0 0 0 0-64 -1 350 Maintenance costs 0-76 -133-77 0-21 -22-110 -24-51 -1 074 Harvesting costs 0 0 0 0 0 0-4 176 0-5 075-441 -9 251 Revenues - wood 0 0 0 0 0 0 11 485 0 13 955 1 211 25 441 Revenues - land 0 0 0 0 0 0 0 0 3 367 160 3 367 CF -3 912-138 -196-141 -65-86 7 218-182 12 148 628 13 192 NPV -3 912-4 043-4 217-4 335-4 386-4 451-741 -1 067 2 554 IRR 9.35% 34
Floresta Atlântica Fund: Product Diversification Maritime pine - Greenfield 20,000 15,000 10,000 5,000 0-5,000 0 1 2 3 4 5 10 15 20 25 30 35 Revenues - land Revenues - wood Harvesting costs Maintenance costs Instalation costs Insurance Managment costs Land Acquisition -10,000 Species Maritime pine Mill gate price: 50 Greenfield 35 years rotation MAI 8 m3/ha/year Products wood, resin Before other non wood products Year 0 1 2 3 4 5 10 15 20 25 30 35 Average TOTAL Land Acquisition -1 000 0 0 0 0 0 0 0 0 0 0 0-28 -1 000 Management costs -42-43 -44-45 -45-46 -51-57 -62-69 -76-84 -61-2 184 Insurance -15-15 -16-16 -16-17 -18-20 -22-25 -27-30 -22-780 Installation costs -1 350 0 0 0 0 0 0 0 0 0 0 0-38 -1 350 Maintenance costs 0 0 0 0 0 0-305 -175-45 -49-54 -60-25 -898 Harvesting costs 0 0 0 0 0 0 0-242 -700-1 311-2 097-4 866-256 -9 215 Revenues - wood 675 0 0 0 0 0 0 672 1 944 3 641 5 824 13 516 730 26 272 Revenues - land 0 0 0 0 0 0 0 0 0 0 0 3 560 99 3 560 CF -1 732-58 -59-60 -62-63 -374 179 1 115 2 187 3 570 12 036 400 14 405 NPV -1 732-1 787-1 840-1 890-1 939-1 986-2 366-2 433-2 280-1 866-1 324 177 IRR 6.25% 35
Floresta Atlântica Fund: Product Diversification Product Kg/ha Price/Kg Potential Revenue/ha Wild sweet cherry 400 0,80 320 Wild cherry peduncle 10 12 120 Wild blackberry 40 1,60 64 Wild blackberry Wild sweet cherry Wild strawberry tree Chestnut tree Cypresses branches and leaves 2.500 0,19 475 Eucalyptus leaves (biological) 250 1,5 375 Wild strawberry tree 400 0,8 320 Touristic Hunting Fees 80 Resin (Maritime Pine) 330 wounds 0,3 90 Pasture (plus royalties on the grants) 30 Chestnut tree (Chesnutt) 1.750 1 1.750 Chesnutt tree (wood) 180 ton 130-150 /ton (mill gate) Cherry tree (slow growing) 150 ton 180 /ton (mill gate) Irrigated orchards (almond and nuts) Investment Nucleus Product Area (ha) Price ( /kg) Private Natural Park Concession Production (kg/ha) NPV IRR Yet to be determined Maintenance Instalacion Costs costs ( /ha) ( /ha/year) Initial 10 years FUNDÃO nuts 32,1 ha 3,80 3 368 2 676 835 24,6% 4 749 10 294 15 043 UNHAIS nuts 57,1 ha 3,80 4 222 6 363 607 29,9% 6 197 10 270 16 468 Sub-Total nut orchard 89,3 ha 3 917 9 040 443 MOGADOURO almond 23,8 ha 4,30 1 850 1 222 366 28,4% 7 793 11 493 19 286 PINHEL almond 22,4 ha 4,30 1 900 1 643 075 21,2% 10 684 8 967 19 650 CASTELO RODRIGO almond 96,7 ha 4,30 1 850 5 839 567 19,4% 5 946 5 443 11 389 Sub-Total almond orchard 142,9 ha 1 856 8 705 008 Total irrigated orchards 232,1 ha 17 745 450 24,3% Total 36
PATIENT CAPITAL Market Conditions SOCIAL CAPITAL Country Conditions Successful Investment Risk Management ECOLOGICAL CAPITAL Partnerships ECONOMIC CAPITAL 37
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