2013 US Timberland Ownership: Descriptive Statistics

21 03 2013

According to Forisk tracking of timberland ownership in the United States, 117 firms currently own or manage in excess of 100,000 acres of timberland. These firms feature the following descriptive statistics:

  • As a group, they own/manage 86.2 million acres of timberland.
  • On average, they own/manage 736,589 acres of timberland.
  • The median ownership is 312,000 acres.

Assuming an average per acre value of $1,500, each firm owns or manages on average $1.1 billion in timberland assets.

Analysis of private timberland in the U.S. affirms the concentrated nature of large ownerships.  While U.S. Forest Service research by Brett Butler concludes that 10 million family forest owners account for 264 million acres (35%) of U.S. forestland, Forisk research indicates that the 286 largest owners alone account for 92.1 million acres.  Each of the top ten own or manage in excess of 2 million acres.

The top 10 timberland owners as of January 2013 include:

20130321 Timberland ownership

For detailed data on US timberland ownership and more information on Forisk’s 2013 US Timberland Owner List, click here.

Thomas Jefferson and Timberland Ownership in the United States

15 03 2013

Through executing the Louisiana Purchase in 1803, President Thomas Jefferson proved himself, among other things, the preeminent timberland acquisition professional.  In this bold embrace, he more than doubled the size of the United States by acquiring 820,000 square miles of land west of the Mississippi from France for $15 million dollars.  That equals 524.8 million acres at 2.9 cents per acre (or just over 50 cents per acre in today’s dollars).

[Picture an excerpt from Jefferson’s resume:  Experienced negotiator and real estate professional.  Acquired over half a billion acres of fertile soil and natural resources. Includes land in 14 states such as Arkansas, Colorado, Iowa, Texas, the Dakotas (both) and Wyoming.  Creator of the swivel chair.]

The Louisiana Purchase was opportunistic.  U.S. negotiators wanted to buy New Orleans, but Napoleon needed financing to wage war on England.  So he rejected the New Orleans proposal and countered with a deal to sell all of France’s North American land holdings.  The U.S. team, led by Secretary of State James Madison, took the offer and closed the transaction.  Bada bing, bada boom.

Forisk’s ongoing research of timberland investment vehicles highlights how private timberland owners and ownership have changed over time since the days of powdered wigs.  Today, timberland investment professionals scour the landscape and courthouse documents for the next purchase in Louisiana or in Arkansas or in Texas.  As of 2013, Forisk counts 217 owners that each own and manage 25,000 acres or more for a total of ~91 million acres of private timberlands.  Of these acres, 18% are owned by the four public timber REITs (Plum Creek, Potlatch, Rayonier and Weyerhaeuser).

For detailed data on US timberland ownership and more information on Forisk’s 2013 US Timberland Owner List, click here.

Forest Finance: “Drive-By” Timberland Valuations

3 02 2013

Want a simple method for valuing stocks and income earning real estate or timberland?  Consider the Dividend Discount Model by dividing next year’s income, assuming it will be earned annually in perpetuity, by a constant discount rate or cost of equity.

20130203 Forest Finance figure 1

For example, assume that Forisk stock pays $1.00 per share annually in perpetuity.  How much would you be willing to pay per share if you required a 10% rate of return?  According to the Dividend Discount Model, you would pay $10 per share.

20130203 Forest Finance figure 2

If we think about this model with forestry investments in mind, assume a timberland ownership generates $100 of net income per acre per year.  Applying a 6% discount rate in the Dividend Discount Model ($100/6%) gives a valuation of $1,667 per acre.  For those of us in timber, we can see that this approach gets us “in the ballpark” and provides a simple approach for “drive-by” valuations…..

Click here to register for “Applied Forest Finance” on February 7th in Atlanta, Georgia.  The course details necessary skills and common errors associated with the financial and risk analysis of forestry-related investments. Registration includes copies of our “Forest Finance Simplified” handbook.

Forest Finance: When is the “Current Stand Approach” Useful for Valuing Timberlands?

30 01 2013

When talking about timberland investing while having a beer or standing over the hood of a truck, not when signing checks or allocating capital…..

A reasonable estimate of a forest’s current economic value equals the standing merchantable volume multiplied by the current stumpage prices in the local market. Investors sometimes use this “back-of-the-envelope” technique to estimate the liquidation value of a timberland investment or forest-owning firm. However, this basic approach suffers from observable, value-destroying limitations.  Why? It ignores the potential for generating greater wealth by holding the forest to economic maturity, investing in forest management, identifying other revenues, or accounting for taxes or opportunity costs associated with the land and capital.

This snapshot value faces other weaknesses.  First, current realizable values for the standing timber will be low at any given point in time.  Also, for large timberland ownerships or plantations, the local market can rarely absorb a total liquidation (clear cut) of inventory without depressing local prices.  From a valuation standpoint, the former incents conservatism and the latter incents unreasonable optimism.  Generally, appraisers valuing forests completely avoid current stand valuations (in writing)…..

Click here to register for “Applied Forest Finance” on February 7th in Atlanta.  The course details skills and common errors associated with the financial and risk analysis of timberland and other forestry-related investments.

Forest Finance: Common Errors and Suggested Solutions

23 01 2013

News flash: we all make errors when analyzing forestry investments.  Which are the most common and how can we avoid them?

At the end of the day, most analytic errors in forestry relate to the data used – the inputs – or the math in a spreadsheet.  Errors associated with inputs affect the cash flows in the analysis and how it impacts value when discounted back to the present.  When reviewing models for clients, we commonly find errors associated with the assumed costs, the estimated revenues, the timing of cash flows and the expectations associated with inflation and asset appreciation.  Specifically, in our work and the work of others, we focus on and observe three major categories of errors in Excel models and spreadsheets.

First, we find that analytic errors in Excel are common.  Of all of the spreadsheet models we review, approximately one-third have an error in a formula (that we find). Most often, these are associated with “relative” and “absolute” referencing, where a formula is pulling in data from the wrong cell or worksheet.  Professor Ray Panko at the University of Hawaii, who actually conducts spreadsheet research (http://panko.shidler.hawaii.edu/ssr/), noted in a 2006 interview with the Wall Street Journal that “you’re going to have undetected errors in about 1% of all spreadsheet formulas.”

Second, we observe application errors, which basically reference issues with the thinking behind the spreadsheet, the formula chosen, the use of a formula, or a comparison made.  For example, analysts commonly make mistakes with inflation by mixing real and nominal discount rates and cash flows.  Also, spreadsheet models of forestry investments may inappropriately compare before and after-tax results and investments of differing duration (time periods). Finally, using the incorrect metric can be problematic, such as misapplying cash-on-cash return, pay back analysis and internal rate of return (IRR).  We typically find errors of this type when analysts are comparing timberland and forestry investments with alternative asset classes, such as stocks, bonds, agricultural commodities and commercial real estate.  Historically, the day-to-day metrics for forestry differed in application, so a bit of time spent checking assumptions and thinking through the communication of results can be helpful.

Third, errors of omission are especially problematic (and embarrassing).  We work hard to avoid the situation of being asked “did you check _____?” and, if relevant, having to answer “No, we didn’t think of that.”  Ugh.  Unfortunately, we find that third-party spreadsheets often omit key facts or considerations, including relevant costs and potential revenues.  Just as important can be confirming that the assumed costs and revenues are current and reflect the best available, accessible information.  In short, know what’s knowable.

We observe a few key practices in our work with clients to minimize the chance and occurrence of errors.  First, we label tabs and worksheets, and date all files. That way, if we revisit a model several weeks or months later, we can retrace our steps and know what we’re working with.  Also, if we correct an error or make another improvement, we know which version is the most current.  Second, we try to set aside time to check each other’s work before sending results “out the door.”  Admittedly, this is also the most challenging.  We find that imposing and embracing milestones – midpoints for deliverables or reviewing work – throughout a project institutionalize a level of quality control.  Finally, at the end of the day, we ask ourselves the question “where could we have blown this?” Some level of paranoia and self-awareness is required for quality analysis of forestry, or any other, investments.

Click here to register for “Applied Forest Finance” on February 7th in Atlanta.  The course details skills and common errors associated with the financial and risk analysis of timberland and other forestry-related investments.

Forest Finance: What Does a Negative or Zero NPV Say About My Potential Timberland Investment?

16 01 2013

Attention shoppers!  An NPV of zero does not necessarily indicate “bad investment.” 

Previously, we discussed applications and limitations of using cash-on-cash (COCR) return as a metric for analyzing forestry and timber investments, as well as questions related to internal rate of return (IRR) and return on investment (ROI).  This generated a question from readers related to net present value (NPV): “Should a negative NPV automatically kill a potential forestry investment?”

Short answer: NO.  Let’s discuss.

NPV is the present value of future revenues minus the present value of future costs.  It is a measure of wealth creation relative to the discount rate.  So a negative or zero NPV does not indicate “no value.”  Rather, a zero NPV means that the investment earns a rate of return equal to the discount rate.  If you discount the cash flows using a 6% real rate and produce a $0 NPV, then the analysis indicates your investment would earn a 6% real rate of return.

Additionally, a negative NPV means that the present value of the costs exceeds the present value of the revenues at the assumed discount rate.  Any investment will produce a negative NPV if the applied discount rate is high enough.  So it makes sense to double check the estimated costs to look for opportunities to economize, to review the sources of revenue to seek potential enhancements, and to revisit the assumed discount rate.

Click here to register for “Applied Forest Finance” on February 7th in Atlanta.  The course details skills and common errors associated with the financial and risk analysis of timberland and other forestry-related investments.

Forest Finance Q&A: Cash-on-Cash Returns versus IRR and ROI for Timberland Investing

9 01 2013

While cash-on-cash (COCR) return – a percentage often used by investors to evaluate income-producing real estate – has limitations when applied to timberland investment performance, it consistently generates interest from institutional investors.  Below are questions analysts asked us about COCR:

Q:           When estimating internal rate of return (IRR) for a timberland investment since inception based on cash returns, why are timberland portfolios often zero or negative?  How can we recommend such investments?

A:            Timberland investments often have periods of low or negative cash flows, especially when timber prices are low and forest managers delay harvest activities.  In fact, noting that a given tract of timberland has negative cash flows for a given year does not tell us much at all about the quality of the investment.  For example, replanted timberlands generate negative cash flows today and may represent robust and attractive investments.

Calculating negative net IRRs that fail to include an assessment of net asset value (NAV) is like summing cash flows to date and subtracting the purchase price.  This would represent “payback analysis” misapplied.

Q:           What is the difference between return on investment (ROI) and COCR?

A:            Consider the following example:  you acquire a timberland tract for $500,000 and sell it later for $550,000. Your ROI is 10%. The 10% return ($50,000 increase on $500,000 purchase price) reflects the increase in your “total investment (Loan + Down Payment).”  If you put down 50% ($250,000), not accounting for closing costs and commissions, your cash on cash return is 20%. The return you made on invested CASH is 20% ($50,000 increase on $250,000 cash invested).  If you paid all cash for the tract, then COCR and ROI are equal.

Click here to register for “Applied Forest Finance” on February 7th in Atlanta.  The course details necessary skills and common errors associated with the financial and risk analysis of timberland and other forestry-related investments.