Using Regional Risk Measures to Help Price Global Timberland Investment Opportunities

Transcription

1 Using Regional Risk Measures to Help Price Global Timberland Investment Opportunities October 24, 2012 Brent Keefer Director, Resource Planning & Investment Strategy 99 High Street, 26th Floor Boston, MA (617)

2 Discussion Outline Develop a real rate of return level for a global timberland benchmark Analyze regional levels of timberland risk and estimate regional adjustments to the base rate Determine target return levels for individual timberland investment opportunities 2

3 Hancock Timber Resource Group Overview Founded in 1985; subsidiary of Manulife Financial Corporation Global portfolio: USD 10.8 billion / 6.6 million acres* US, Canada, Australia, New Zealand, and Brazil World s largest timberland investment manager Managing assets outside the US since 1992 Diversified workforce: Foresters, Investment Management, Finance/Accounting Over 450 employees worldwide * As of July

4 Hancock Timber Resource Group Core global investment regions Current Investment Regions (% of AUM)* New Zealand, 17% Canada <1% US Northwest, 27% US Northeast 4% Australia 17% US South, 35% Brazil <1% * As of July 2012 estimated Current investment regions Targeted investment regions 4

5 Develop a Benchmark Rate Consistent with conditions across broader US capital markets 10% Historical Timberland Base Rates Compared to Yields on US Commercial Properties and US 10-year Treasuries (% per year) 8% 6% 4% 2% 0% NCREIF Commercial Real Estate US 10-year Treasuries

6 Develop a Benchmark Rate Consistent with projected IRRs for properties under management Update management plan cash flow models for current conditions, market outlooks, and price forecasts Calculate forward looking IRR projections based upon current third party appraised market values Assess regional and overall average projected returns 6

7 Regional Adjustments to Global Base Rate Analysis regions can be defined as a country or within country regions Country level Market development regions Primary production species Roraima Amapa Acre Amazonas Rondonia Para Maranhao Litigated Zone Ceara Rio Grande do Norte Paraiba Piaui Pernambuco Alagoas Tocantins Sergipe Mato Grosso Bahia GoiasDistrito Federal Mato Grosso do Sul Minas Gerais Espirito Santo Sao Paulo Rio de Janeiro Parana Santa Catarina Rio Grande do Sul 7

8 Relative Risk Index (100 scale) Regional Adjustments to Global Base Rate Six components of risk are evaluated at the investment region level Country risk Sovereign risk Operational / execution risk Timber price volatility 35.0 Timber market depth and diversity Timber market concentration 20.0 Timber volume risk (physical hazards and technical) Investment liquidity Base Region Target Region 8

9 Regional Adjustments to Global Base Rate Operational country risk factors are most pertinent to direct investments Variety of rating services available to quantify risks Category Institutional Timberland Investment Related Attributes Institutional Effectiveness, Corruption, Commitment to Pay, Security, Legal & Regulatory Framework, Tax Policy, Infrastructure Structural Labor Market, Demographics, Soft Infrastructure, Hard Infrastructure Ease of Doing Business Registering property, Protecting Investors, Trading Across Borders, Enforcing Contracts Also important to capture execution risks specific to timberland investments Environmental and societal risks Legal and regulatory risks 9

10 Share of Total Consumption Regional Adjustments to Global Base Rate Market assessment involves both qualitative and quantitative measures Timber price volatility Develop a basket of prices Calculate historic volatility Market concentration Market depth and maturity How diverse and competitive are the outlets for a given product? How balanced is the wood supply relative to the demand? What is the overall quality of the facilities in terms of technology deployed, capital invested, and financial viability? 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Market Concentration Number of Facilities Lower Concentration M oderate Concentration Higher Concentration 10

11 Regional Adjustments to Global Base Rate Risk of loss due to physical hazards and technical forest management Risk of loss due to natural hazards includes fire, weather, insects, and disease Technical risk issues relate to forest management execution Genetics Growth and yield Forest inventory Forest management 11

12 Risk Rating Regional Adjustments to Global Base Rate Risk components are rated and then scaled for comparison Un-weighted Individual Components of Risk Region 1 Region 2 Region 3 Region 4 Region 5 Region 6 12

13 Specific Investment Return Target Assessment framework can be used to adjust for the targeted investment opportunity s specific risk profile Example Investment Project Adjustments Risk Component Region Specific Project Country risk Adjustment Rationale Price volatility Additional export market Market depth Additional export market Market concentration Favorable fiber supply agreements Volume risk Improved fire prevention Liquidity Total Ranking

14 Specific Investment Return Target Structured framework provides a basis for making informed decisions Assessing riskiness remains a challenging task often characterized by incomplete information Well understood risk components can be accounted for with direct adjustments of the projected cash flows in the valuation model Timberland investing on a global scale can offer attractive alternatives for investors seeking diversification 14

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