Timberland Values: Up, Up and Away

Timberland Value Step Change Sets Up Further Liquidation Events

Where are timberland values heading? Why hasn’t the credit crunch collapsed timberland sale values? At these values, how can the land rich corporations or, for that matter, TIMOs that amassed large properties years ago justify retaining their property?

With clear industry headwinds in its face, TimberStar pulled off a tremendous coup last month with the sale of 900,000 acres in Louisiana, Texas and Arkansas at about $1,900 per acre. In October 2006, they bought the property for around $1,100 an acre. The buyer, Hancock Natural Resources Group, is no newbie to timberland investments and must know more than the rest of us.

This sale is just the latest in an unending chain of subsequently higher priced timberland sales.

Why did this sale, with little or no higher and better use tracts, sell for such a stratospheric price? I present a number of theories in no particular order:

• Billions of dollars in unspent allocation among timberland invest managers—allocated, but not earning fees until placed.
• Traditional 7 to 8 percent cap rates have been compressed to the low single digits.
• The weak dollar and recent exchange rate favors foreign capital investments.
• Inflationary pressures during economically uncertain times typically redirects capital flows into so called “ hard assets” as a hedge.
• Timberland investments have been mainstreamed and are no longer true alternatives.
• New potential from carbon credits, cellulosic ethanol and woody biomass has put an additional “ sizzle” into the investment.

The reason lies in one or more of these explanations, because current log product markets don’t justify the price.

In “normal” markets, there is a spread between land prices per acre and stumpage prices. It is clearly “abnormal” for this spread not to exist in historic terms. In fact, there have been only two periods in the past 30 years where this spread did not exist—1977 and the current market.

The historic range of the stumpage price multiple as a proportion of timberland value is from around 15 to 50. The un-weighted annual average is 28, but absent 1977 and the current market, the historic averages is closer to 23. In other words, southern pine timberland historically sold for around 23 times the going rate of sawtimber stumpage. This means that the current multiple of stumpage price to timberland prices is more than double the historic average. Before our last correction in timberland values, circa 1988, this multiple was still shy of 30. I know this is a simple metric and my sophisticated investor friends will poke holes in the theory—nonetheless, it's simple and true.

I certainly don’t believe the sky is falling, but when asset prices start ballooning past a point that can be justified by the underlying economics of the products produced from that asset, there are two things that may have happened. First, the market may be in transition and a true step change has occurred. A good example of this change is when timberland moved out of the corporate hands into institutional investment hands. I submit that this change started 20 years ago. The second, more ominous possibility is that we are at the end of a long upward cycle and the edge of the cliff is near.

Whichever it is—and believe me, I don’t know—the hyper inflated timberland market is forcing changes on those who would rather not have to deal with it.

Your time is up:

...is what the Weyerhaeuser board likely said to Steve Rogel when they replaced him last week while still holding strong to the idea that legislative tax relief would be his savior.

...is what TIMOs, who invested in timberland circa 1998-2002 and have done little else since, will hear from their investors.

...is what investors will say to REITs who really cannot compete in today’s low margin and now lower cash flow environment. “The 6 percent dividend is real nice, but millions in my pocket is a more meaningful down payment on that ‘little’ Caribbean island I had my eye on.”

I say all this tongue-in-cheek, but I have to believe that many timberland investors are having their arms twisted to sell as never before. My advice? BE THE FIRST TO SELL, because if history is our guide, the boom can’t last.