Valuation of Teak Plantations in Central America Jeff Wikle, MAI & Adam Watson TerraSource Valuation, LLC Panama City, Panama at the DANA Timberland Investment Conference: May 2016
About TerraSource Valuation 2
Outline 1. Timberland Appraisal Analytics Mature Markets 2. Special considerations for Central American teak plantations 3. How should the appraisal process be adapted? 4. What are the strengths and weaknesses?
Timber Timberland Investment Characteristics A crop which: Grows in absolute volume and relative value But percentage volume growth decreases year over year Larger size produces increasing value per unit year over year Tropical Plantations - Highest growth rates Can mature in as little as seven years (tropical pulpwood - eucalyptus, gmelina, acacia, etc.) A well managed plantation project may grow in volume by a sustained economic and biological rate of 10% - 15% per year 4
Timberland Appraisal Information Flow Chart Timber Tracked in Green ; Land Tracked in Red Cost Approach Sales Comparison Approach Income Approach Comparable Timber Sale Data Comparable Timberland Sale Data Timber and Land Allocations Market Expense Data, Growth Yield Output, Rate Surveys, Etc. Retail Timber Value Estimate (Subject Timber Units by Unit Values) Land Value Allocation (Est. Unit Values X Subject Units) Timber Comp Adjustment Process Sales Comparison Data Presentation Land Comp Adjustment Process Harvest Schedule Projections Projected Retail Timber Sales (Volumes X Retail Unit Values) over Holding Period Initial Subject Value Estimate (Timber Value + Land Value) Adjusted Comparable Timber Unit Values Adjusted Comparable Land Unit Values Management, Sale Expenses, Taxes, Other Income, etc. Plus or Minus % Timber Discount or Premium Reversion Calculation (Timber Comp Unit Values X Subject Timber Units) + (Comp Land Unit Values X Subject Land Units) Projected Cash Flow Statement (10-50 Years) Adjusted Subject Value Estimate (Adjusted Timber Value + Land Value) Reconciliation of Separately Adjusted and Summed Land and Timber Comparables Evaluation of Risk; Choice of Discount Rate; Discounting of Cash Flows Value Estimate Value Estimate Value Estimate Reconciliation Final Value Allocation Final Value Estimate
Mature Markets Mature Market Regions: US South, Northwest and Northeast New Zealand Australia Canada Targeted Precise Value Cost Approach Three Approaches: Cost (CA) Sales (SCA) Income (IA) Income Approach Sales Comparison Approach 6
Mature Markets Data Sources Forest Silvics - Trees Mgmt. Costs Timber Markets Harvest & Hauling Costs Retail Timber Pricing Timberland Markets Timber and Land Value Allocation 7
Mature Markets Cost Approach Procedure Timber Value Timber Markets Timberland Markets Discount or Premium Cost Approach Value Estimate $ Land Value 8
Mature Markets Comparable Sales (Land & Timber) Allocated Land Units Allocated Timber Units Sales Comparison Procedure Subject Land Units $/ha Subject Timber Units $/m3 Sales Comparison Approach Value Estimate $ 9
Mature Markets Forest Timber Markets Income Approach Procedure Silvics and Costs Retail Timber Prices Timberland Markets Land Allocation (Reversion) Discounted Cash Flow Analysis (DCF) $ 10
Optimal silvicultural regime still developing Wide range of cost structures Increasing use of clonal material from various sources Teak Valuation Issues Developing Forest Management Practices Source: GFAM 2012 11
Hoppus Formula: Relict British measure based on cuboid formula Teak Valuation Issues Hoppus Pricing vs. True Cubic Meter Inventory Smalian/True Volume = 0.183 m 3 Price: $360/m 3 Underestimates volume, resulting in higher unit value Involves length & girth penalties which may vary by contract At least a 22% volume discount, more with penalties (allowances) Log Value: $66 Hoppus Volume (w/ allowances) = 0.124 m 3 Price: $530/m 3 Log Value: $66 12
Teak Valuation Issues Timberland appraiser must interpret land markets Use appropriate market analytical techniques Land sales, leases, etc. Recognize Highest and Best Use (HBU) - Move from static, long term timberland to cropland, pasture or tree plantations Shortening timberland investment horizons increases land values Much teak land is in growing agricultural areas and competes with row crops and cattle grazing 13
Teak Valuation Issues Specialized Markets Primarily export-oriented to India 14
Population: Billions Current USD Teak Valuation Issues Market projections tied to Indian economy 1.4 $3,000 1.2 $2,500 1.0 $2,000 Urban population 0.8 0.6 $1,500 Rural population $1,000 0.4 0.2 $500 Household consumption expenditure per capita 0.0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: World Bank $0 15
US$ Millions Teak Valuation Issues Impact of Myanmar export ban short term & long term Value of Myanmar Teak Imports to India $500 $400 Myanmar (roundwood) $300 $200 Rest of World (roundwood) World Sawnwood $100 $0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Government of India Trade Statistics 16
US$ Millions Teak Valuation Issues Latin America gaining market share in India $350 Value of Non-Myanmar Teak Imports to India $300 $250 $200 $150 $100 Rest of World C. America S. America Africa $50 $0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Government of India Trade Statistics 17
Teak Valuation Issues Impact of Myanmar export ban short term & long term $1,000 $900 Myanmar Teak Import Unit Values to India (nominal) US$ per M 3 $800 $700 $600 $500 $400 $300 $200 $100 Myanmar (roundwood) Rest of World (roundwood) $0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Government of India Trade Statistics 18
Myanmar Teak Supply Timeline April, 2014 Log Export Ban January, 2015 155 Chinese loggers arrested in Myanmar Sept., 2015 EIA report documents continued log trade to China April, 2016 Myanmar minister announces total logging ban Current Conflicting statements from Myanmar officials; no logging ban
Teak Valuation Issues Sustained appreciation in plantation pricing will it continue? $500 Regional Teak Import Unit Values to India (nominal) $400 Africa US$ per M 3 $300 $200 $100 C. America S. America 3.0% Compounding $0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Government of India Trade Statistics 20
Teak Valuation Issues Plantations - Wide Range of risk factors Political Stability Currency Risk Infrastructure Environmental 21
Teak Valuation Issues Dozens of countries What discount rate? 22
Adapting The Appraisal Process 1. Inputs for each approach should be grounded in market data and operational metrics 2. Recognize strengths and weaknesses of each approach **Age Class Structure & Management History are key** 3. The Big Picture thoughtfully reconcile the approaches
Cost Approach Premerchantable Timber Match typical costs with plantation history/quality Reality check per hectare value against early liquidation value Merchantable Timber True $/m 3 True m 3 Hoppus $/m 3 Hoppus m 3 Reliability of inventory? Land Access Topography Drainage Agricultural suitability 24
Sales Comparison Approach Market Data Allocations Adjustments Interest in teak investment growing More established plantation properties are changing hands Markets still far from mature Sale confirmation process may be challenging Timber allocation a fast moving target - plantations accrete volume while moving up the steep pricing gradient Large timber adjustments needed with limited information Comparison between countries/regions difficult underlying investment risks vary widely 25
Income Approach Yields Price Forecast Discount Rate Moving target as silviculture and use of clones advance Ground truth with final harvest results & plot data from older clones Support: Historical appreciation, India s economic growth, increasing plantation quality Threats: Changing preferences, substitution, engineered wood products Highly sensitive, but less support than in mature markets Local risk factors also important: infrastructure, high proportion of clones, marginal/wet sites 26
Reconciliation Cost Approach Sales Comparison Approach Income Approach Strength: Young plantations & mature plantations with good inventory Weakness: Intermediate ages- theoretical cost forwarding; liquidation ignores future value Strength: Benchmark/validation of overall value range Weakness: Limited data for large adjustments Strength: Adaptable and transparent; directly models investor behavior Weakness: Highly sensitive to inputs Yields Discount Rate Price Appreciation 27
Questions Auditors? Clients A p p r a i s e r Thank you!! 28