INVESTMENT in US TIMBERLAND TIMO vs DIRECT INVESTMENT 24 October 2012 Michael Tragner - President Fountains America
Characterization Direct Investing High net wealth family, company or institution directly acquiring & owning title to the asset & formation of a business structure such as an LLC or other investment vehicle. Investing Through TIMO Similar investor types (including fund to fund) entering the asset class through pooled or single fund; TIMO s also do; Non discretionary, single fund by one investor; Individual client-managed funds Each similar to direct investing where in many cases investor has greater control over the decision process. 2
History of Timberland Investment 1900 s Control of timberland through VIFPCo 1980 s TIMO emergence Throughout Direct investment: small-scale, private sector, few institutions 1990 s integrated companies dispose of timberland assets VIFPC set up as C-Corps inefficient tax structure Current tax advantages of the REIT were not available Capital Constrained conflict in optimizing woodland versus mill investments Conflict in optimizing timber resource woodlands sell high, mill buys low Forest products can be purchase at the gate Watershed event - Value of timberland exceeds capital value of stock Mass sell-off - created opportunity for TIMO s and direct investors Simultaneously, timberland asset gained traction - portfolio diversification Outcome 1980 s VIFPCo largest landowners 2005 the numbers halved Today 2 dozen TIMO/REIT s, largest landowners 3
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Acres History cont. Acreage acquired by TIMO s > direct investors outside TIMO/REIT structure Early on DI short term, opportunistic transactions - today more longer term During recession transaction levels reduced, timberland values fell and available capital stood at a standstill In 2010 TIMO s began to raise 9000 significant funds 8000 Today demand 7000 greatly exceeds 6000 supply with many 5000 landowners 4000 remaining on the 3000 sidelines waiting for 2000 sawlog price 1000 improvement 0 Year US Timberland Transactions, Acres (000) 4
Investment Structure Investment Thesis Direct Investment Partnerships Legal and tax Acquisition DD Appraiser Forest Manager/Accounting Target Return Time Frame Geography Species Exit Strategy TIMO Fund Marketing In-house Expertise Finance Economics Analysts Forest Management Partnerships Acquisition Forest Manager Other Mgmt. and Value Added Period Periodic Valuation Appraisal Process Divestment Fee structure varies however, most arrangements are fee for service. Fee structure varies however, many arrangements tied to fund performance based on periodic appraisal process and disposal value. 5
Advantages of Investment Vehicles 6
Disadvantages of Investment Vehicles 7
Looking Forward Most future transactions will come from existing TIMO and REIT holdings Will likely still see good deals however The heyday of available timberland w/ opportunity for high returns is over Investor emphasis on timber fundamentals & value added opportunities with a move away from HBU contribution Current gap - investor expectation of return & landowner price expectation Investor interest in US timberland remains strong Demand currently exceeds supply In certain markets values are down creating opportunity Increasing number of private family and corporate investors Certain investors see new and untapped opportunity such as carbon Investors will increasingly be cost conscience TIMO s will remain primary investment vehicle Direct investment will likely gain prominence in light of more sophisticated and value conscience investors and a maturing US timberland market 8
Questions? USA Fountains America 7 Green Mountain Drive; Suite 3 Montpelier, VT 05602 Michael A. Tragner (802) 223-8644 ext 22 michael.tragner@fountainsamerica.com UK Fountains Forestry Alastair Sandels alastair.sandels@fountainsforestry.co.uk 9