forest appraisal

RMK TIMBERLAND GROUP 1

Forest Finance, Valuation and Appraisal…. Oh My!!!!

Dr. Jefferson H. Mayo

RMK Timberland Group

Atlanta, Georgia_________________

Arkansas Forestry Association

October 5, 2011


THANKS! –

Arkansas Forestry Association



Double meaning:

1. Common reaction by many when hearing about the nuance and detail of forest finance, valuation and appraisal techniques (then their eyes glaze over….)



Double meaning:

1. Common reaction by many when hearing about the nuance and details of forest finance, valuation and appraisal techniques (then their eyes glaze over….)

2. Common reaction by some when hearing about the extent of the financial analysis, valuation analysis and appraisal work conducted as part of the routine TIMO business process


Growing ahead of the curve…• When considering intensive silviculture, improved

genetics and various management regimes…

1. What is the traditional forestry approach to making such financial decisions?

2. Anything unique or peculiar about how TIMOs approach these financial decisions?


Presentation OutlineContext

Who am I?

Who is RMK?

Content

Question #1 – Traditional Financial Analysis (The Basics)

Question #2 - TIMOs – Unique or peculiar?

Conclusions

RMK TIMBERLAND GROUP

Context

We see the forest. And we see the trees.

TIMBERLAND INVESTMENT MANAGEMENT


Who am I?Education:

Florida, West Virginia and Clemson (+ 10 years)

Experience:

Union Camp (procurement + 10 years)

University of Georgia (+ 3 years)

Wachovia / RMK Timberland (-10 years)

Current Duties with RMK:

Director of Asset Management and Administration


Who is RMK?

• Established 1981

• RMK Timberland Group is a business unit of Region Financial Corporation (Regions Bank)

• Timberland Investment Manager (TIMO)


What’s a TIMO?Definition - A Timberland Investment Management

Organization (TIMO) is a provider of timberland investment management services:

1. to institutional investors (primarily pension funds, endowments, foundations, etc.) while

2. acting in a fiduciary capacity.


RMK Strategy

• Disciplined acquisition approach

• Diversification of investments (location, species, age, products, etc.)

• Disciplined approach to world-wide opportunities

• Focus on Client Service


TREES GROW !

EMERGING

GROWTH

ESTABLISHED

GROWTH

PULPWOOD CHIP-N-SAW SAWTIMBER

MATURE

GROWTH

GR

OW

TH

AGE


CLIENT FOCUSED ORGANIZATION


Traditional Return Drivers

• Biological Growth

• Land Value Growth

• Stumpage Value Growth


RMK Footprint• Total Property under management – 1.6MM

acres

• U.S. properties in 16 states – 87M acres in Arkansas

• Non-U.S. properties in four countries – primarily South America


RMK TIMBERLAND GROUPU.S. PROPERTY DISTRIBUTION BY STATE


Question #1




Growing ahead of the curve…• When considering intensive silviculture, improved





Financial Analysis Disclaimers

• These are my observations only…

• All the techniques that I mention are actually more detailed and nuanced than I’m presenting … but remember the “eyes glazed over” effect.

• No Equation Zone!


Timberland Valuation and AnalysisThe Basics

Discounted Cash Flow Analysis (DCF):

DCF implies the use of a discount or hurdle rate

Rates may be either real or nominal (with inflation)

Net Present Value (NPV)

Sum of discounted revenues minus sum of discounted expenses over the entire holding period

Internal Rate of Return (IRR)

Discount rate at which NPV = ZERO.


The Basics

Two Common DCF analysis in Timberland Applications:

1. Evaluating (valuing) projects for capital decisions – Question: At what price do I buy or sell?

2. Marginal Analysis – Question: Is the incremental or marginal cost of some alternative justified by the incremental or marginal revenues generated above the base case?


The BasicsRevenues:

Include stumpage prices, harvest volumes, net

growth impacts, miscellaneous revenues, price

appreciators, period ending values, etc., etc., etc.

Expenses:

Include annual management costs, taxes, treatment

costs, various cost appreciators, etc., etc., etc.


The Basics• For the most part, financial techniques applied

to decision–making in timberland analysis are not especially complex

• The longer planning horizons can be especially challenging

• The “timing” of events (especially asset sales) is key.

• There are always constraints…


The Basics• The quality of any DCF analysis depends

primarily on the accuracy of the cash flow projections

• “It’s the data... It’s the data… It’s the data!”

• In practice, cash flows are not usually “well-behaved” so analysis is conducted using spreadsheet or data base apps, not equations.


Question #2




To grow ahead of the curve…• When considering intensive silviculture, improved





Key to Understanding TIMOs?Definition - A Timberland Investment Management

Organization (TIMO) is a provider of timberland investment management services:

1. to institutional investors (primarily pension funds, endowments, foundations, etc.) while

2. acting in a fiduciary capacity.


Key to Understanding TIMOs?Investors / Clients:

• Sophisticated

• High level of felt responsibility and commitment

• Objectives vary by client

Role as fiduciary:

• Bias toward third-party involvement

• Increased documentation and due diligence


What RMK does for clients….1. Develop Investment Strategy to meet client

Objectives,

2. Acquire Property (to fulfill strategy) ,

3. Manage Property during the holding period and

4. Dispose of property at financial maturity.


TIMOs do lots of financial analysis!


The Analysis follows function….1. Acquire and Dispose of Property:

Questions: At what price (or when) do I buy or sell?

2. Manage Property during the holding period:

• Schedule the cut, strategic and tactical planning, the evaluate stand treatments or regimes, etc.

• Determine property valuations for return calculation


Property Valuations >>> AppraisalsAppraisals provide an estimate of market value

(an average expected sales price for similar property)

Typically use multiple approaches to value:

• The cost approach

• The sales comparison approach and

• The income approach


Appraisals“Expert” appraisers are required…

• Heterogeneous nature of real property

• No readily available, market-based pricing system

• Appraisals usually done annually, returns quarterly

• Remember the “Third-party bias”


TIMO Holding Period• TIMOs often have shorter duration planning

horizons

• Higher resolution – often annual – planning periods

• This situation requires better data


Conclusions




ConclusionsIn forestry financial analysis:

• DCF is king… although not too complicated

• We are cash flow builders

• “It’s the data... It’s the data… It’s the data!”


ConclusionsTIMOs do have some unique / peculiar traits:

• The nature of the investments, sophistication of clients and fiduciary responsibility drive TIMO behavior.

• Often use third-party inputs – appraisals, price reporting services, audits, etc.

• TIMO basic business functions are analysis intensive… we are investment managers


Conclusions• The quarterly valuation / annual appraisal

process is significant and requires improved systems

• TIMO holding periods impact analysis and data requirements

• In some ways, the “bar is being raised” regarding “best practices” for due diligence, valuation, documentation and reporting.


Conclusions• The due diligence and analysis process for

acquisitions and dispositions is significant.

• The application of planning and analysis to on-going management activities is significant

• The “bar is being raised” for timberland best practices for due diligence, valuation, documentation and reporting.

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