sustainable forestry investment

Not for distribution

SUSTAINABLE FORESTRY

INVESTMENTCary Wingfield Raditz, CFA


07-Jun-07 Cary Wingfield Raditz, CFA p2

Total Global Forestry Investment

Total investable and leasable global forestlands estimated > 870 million ha

Value > US$480 billion Forestry investment growing 20%

p.a. for 20 years US$35 billion invested mainly in US US$20 billion held by institutional

investors



Timber: the Investment Class

Predictable biological growth Asset growth= forest growth Inventory=stored on the stump Strong historical returns Moderate risk High returns on risk* Portfolio diversification

characteristics * Sharpe ratio



Returns & Risk 1973-2002

Asset Class Returns Risk*Sharpe

ratio

Timberland 14.54% 14.80% 53.79%

Small Cap Equities 14.20% 22.37% 34.06%

S&P 500 10.66% 17.99% 22.68%

Commercial Real Estate 9.53% 5.70% 51.75%

International Equities 9.35% 22.24% 12.46%

Long term Corporate Bonds

9.28% 11.52% 23.44%

US Treasury Bills 6.58% 2.73% 0.00%

*Sharpe ratio = (asset return–return on risk free asset) / risk [standard deviation]



Attributes of Return

Biological tree growth Timber price changes Changes in the value of the

underlying land asset Non-timber forest products and

services—ancillary cash flows



Timber Reduces Portfolio Risk



Investment Suitability of Timber

> 10 years = illiquid Long-term institutional portfolios Endowments, foundations, pension

funds, insurance companies, high-net worth

Matches maturity of longterm assets to maturity of longterm liabilities

Low correlation to equities and fixed income provides diversification

Certified forestland suitable for socially responsible investors



Investment Vehicles

Purchase forestland—manage timber assets

Forestry product equities Forestry product bonds REITS—real estate investment trusts TIMOS—Timber Investment

Management Organizations Private equity partnerships



Environmental Issues

Climate change Soil and freshwater

conservation Loss of biodiversity Forest systems play a critical

role in managing environmental problems



Forestland Management Methods

Clear cutting (controversial) Pure conservation—tax deductible

gifts of forestland Sustainable forestry management

—”pure play” Forestry operations includes

processing Certified forests (FSC)—biodiversity Non-timber forest products (NTFPs) Capturing PES cash flows--e.g., CERs Structured methods—e.g. easements



Tropical Forestry Investments

Fast growing in tropics (short rotation) High discount for Emerging Markets risk Controversial (Equator Principles) Lessons learned: Mitigate country risk

(management, rigorous internal controls, portfolio diversification)

:Factor costs of poor infrastructural :Neutralize corruption risk :Coop local community participation in forest

management :Certify forests :Manage non-timber forest products :Monitize tradable carbon emissions rights

(CERs)



Payments for Eco-services

Carbon sequestration--CERs Water use rights—local (New York

City) Biodiversity—FSC certified (Precious

Woods) Eco-tourism (Texas Inland—hunting

rights) Conservation easements (USA e.g.,

Forest Legacy Trust) Tradable development rights (USA

locally regulated)



Implications for Investment Valuation

Value = Σ of discounted future cashflows

NTFPs and PES are real options When exercised: PES provide

ancillary cash flows “Value enhancements” Reduce illiquidity in afforestation PES converge private good and

public good agenda



Timber Conservation Strategies

1. Pure Conservation

2. Sustainable Harvesting

3. Creative Structured Solutions

4. Example: Selling Easements



1. Pure Conservation

No return of principal or income Forestland gift is tax deductible Appropriate for land having

special value or unsuitable for logging

Example: green belts near urban centers, old-growth riparian forests



2. Sustainable Harvesting

Land harvested sustainably (< 6% of board ft/year)

Sub-optimal timber returns, but is still solid investment

Short-term positive impact on environment

Either requires very long investment horizon or sale of most of land to capture principal and return on capital



3. Structured Solutions

Incorporate PES Tax sensitive strategies--

Easements Partner with non-profit govt and

NGOs (Sierra Club) Structure for socially

responsible investment market



Selling Easements

Conservation easements Development easements Optimal or near optimal

investment returns Fair short term/Good long term environmental

impact Requires foundation and non-

profit funds



Easement Return and Impact Benefits: Conserve wildlife habitat, clean

watersheds, prevent urban sprawl, preserve valuable forestland

Purchase land with merchantable timber Agree to environmental easement on the

property at beginning Satisfy the environmental guideline test Provide investors tax-deductible

contributions Through careful replanting, return the

ecosystem to its natural pre-logging state At end of term, put the land into permanent

conservation through a land trust



Is it Time to Invest?

Opportunities for creative, sustainable solutions

New SRI listings in capital markets Select opportunities in emerging

markets Environment awareness will increase

value of certified wood New international protocols will

increase demand and price of carbon and other PES



Sources of Information

www.forest-trends.org Private placement

memorandum Initial public offering prospectus Hancock Timber Resource

Group www.hnrg.com Rights and Resources

www.rightsandresources.org

sustainable forestry investment

Documents