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Coleman Parks, CEO, Advance Land and Timber, LLC
As we were somehow overlooked as President Obama was forming his
economic advisors for 2009, we are still somewhat flattered when asked what our
economic outlook is for S.C. Timberland in 2009. It is evident from following
Bloomberg and CNN that much of 2009 will be impacted by the inevitable Chapter
Eleven of General Motors, the poor December retail sales and the oncoming
credit card crunch as well as more bank failures. Not a lot of good news
anywhere. Unemployment could possibly go to double digits in 2009. Many
companies and employers will continue to make cuts in order to stay afloat as
manufacturing and construction remains at a stand still. As consumers become
ever more unsure of their employment security or their ability to earn
sufficient income, they will prudently spend less money. Thus our consumer
driven economy has come to a dire halt. Forestry and real estate included.
So how will this affect our timberland markets? This obviously can only
be an educated guess on our part as standard economics have now been replaced
by unpredictable government intervention, bail outs and artificial tools, all
designed to get capitalization back in the economy. So far, the bailout has
been a flop. Most business operators face a mixed bag of declining prices,
deflation, shrinking revenues and proposed tax hikes. The last thing we can
afford to do is conduct "business as usual".
Any recovery will require
restoration of credit and consumer spending. The new Secretary Treasurer has
self admittedly proclaimed he does not know if the new plan will work. If it is
business as usual in Washington, then I suspect not. I am not sure anyone knows
how to do this, but here are our thoughts from a forestry/real estate
perspective. First and foremost, the entire industry will have to embrace
realistic pricing. Do pay careful attention to falling prices. They will affect
you. In 09, across the country there will probably not be significant changes
in the price of land for sale, timberland included, as land tends to plateau
or, at first, resist dropping. The bad new is there has been an across the
board drop in land values (prices) as both dirt and timber stumpage prices fell
in 2008 land sales and 2009 looks worse. For the last 10 years we have seen
both institutional and private timberland ownership make substantial yearly
increases. Anything which goes up rapidly can come down rapidly. We watched
dirt values go from $850 in 2001 to well over $1,200 into 2007. Most of the
increases were easily linked to the abundant cash available from both the
institutional and private market sector. Very simple economics here: everyone
was making lots of money. Pension funds and private investors accounted for
billions of dollars chasing an unprecedented sell off of what started as
undervalued timberland by the paper and timberland giants like International
Paper, Georgia Pacific, Canal, Bowater, Boise, Stone and Weyerhaeuser. Many of
these companies were buyers one day and sellers the next. I can remember being
in the Savannah IP office about 10 or more years ago, arguing with them that
they were the biggest real estate company in the State, to which they said no,
they were the biggest paper company. Today they are neither. Even then I would
guess that Bowater was the biggest, if you considered global land holdings.
Boise came in buying high and left a year later, leaving any profit on the
closing table. Canal sold out. Willamette came in and bought up land only to be
bought out themselves by Weyerhaeuser. A short time later Weyerhaeuser sold out
of South Carolina. IP had bought giants like Federal, Union Camp and Champion.
Then the bean counters on Wall Street said sell. It was their opinion that they
could buy timber on the open market cheaper than they could grow it themselves.
IP literally created their own little economy.
But where are they
today? Were these good decisions? The TIMO's, REIT's, forest investment
companies and private investors were quick to identify and take advantage of
these massive undervalued sell offs. But as the demand for these timberland
sale purchases increased, availability, price and desirability was changing.
Each bid sale brought more buyers with a willingness to pay even higher prices.
Prudent managers began to question if bid sale timberland prices had reached
levels beyond the ability of growing timber to economically support such dirt
prices. This could be the bubble effect we are all too familiar with. It hit
the high tech industry, the stock market, the housing market and now, perhaps
the timberland market. Here again, our observation and opinion will vary from
company to company, and individual to individual. Certainly a lot of money was
made. Some are doing better or worse than others. It would open up a whole can
of worms if we start to speculate on the viability of timberland prices to
sustain their current high levels. Some analysts think prices were overly
inflated. The truth of the matter is, the verdict may remain out. Historically,
TIMO's and REIT forest investments are made as long term investments. I have
seen, for most of these companies, extremely well placed investments at good
timber values, managed intensely for both timber rotation and now, through
companies like ours, with increased emphasis on HBU (Higher and Better Use)
dirt values. If these fund managers are directed or obliged by their clients to
"hold" fast and not required to sell, then these investments should prove to be
good in the long term. However, the caveat or problem will come if any of these
clients sustain large across the board losses in other areas of their
investment portfolio and are forced to sell. Those who hold over priced and
poor quality timberland may be in trouble. Here, a double edge sword could cut
deep. Many pension funds are restricted to specific levels of real estate
investment. At this time it appears the stock market will not return to
acceptable levels to allow many funds to hold on to all of their real estate
holdings. A significant drop or crash of commercial real estate will also occur
in 2009. This could also negatively affect timberland holdings, as some fund
managers will be forced to sell to meet the obligations of maturing funds, as
cash flow will be the name of the game.
If I was a portfolio manager
for a large pension fund, would I continue to invest in timberland? Long term
TIMO and REIT investment strategies are for the most part, very sound, as they
have produced double digit returns historically and limit risk because the
asset is not highly leveraged, usually paid for in cash. Basic supply and
demand factors are now critical as managers must gamble that already high
prices will continue to go higher. Sometimes favorable tax treatment was
involved and further enhanced returns.
Will all of this continue?
Hopefully so, but personally, while we feel that timberland should continue to
outperform the stock market as well as reduce some investor risk, returns are
starting to drop significantly as timber prices continue to fall and dirt
prices continue to rise. Currently, in the turmoil of the stock market,
billions of dollars are being placed by investors who have more concern for
risk than the actual return. While only a massive sell off would trigger highly
diminished prices, there are other factors occurring that could also impact
long term investments.
As demand has dropped for forest products, a very
large number of mills are closing in our market. Supply chains are disappearing
as logging operations close down. As we operate in a global economy now, China
and Asia continue to build new mills and new international companies now
compete with US companies that are no longer competitive. Government
regulations, healthcare, wage and labor laws, and environmental protection will
all come with a huge cost to the future of many US businesses as well as
timberland owners. Tax treatment could become another issue with tax revenues
falling. But the greatest concern is will land sales continue to slide
backwards. Consumer spending is falling. And to make things worse, credit is no
longer easy to come by. Buyers will face stricter lending requirements and
higher down payments as low appraisals will affect the amount of money the bank
will loan on a tract of land.
What should smaller individual investors
and land owners be doing to navigate this downturn? Well first let us qualify
our answer by telling you that our company's single largest investment is in
timberland. We staunchly believe that ownership of land remains the greatest
American dream. There are good deals to be had in this economy. Anyone who has
done their due diligence in the purchase process, bought competitively, managed
their resources to sustainable levels and can merchandize it to full potential
upon sale, will find timberland a good investment. But no investment is without
risk and risks must be managed. We must look for many future opportunities to
support good timberland prices as returns can be driven by not only timber
growth, but bio mass, carbon sequestration, carbon credits, conservation
rights, rare tree species, real estate development, recreational leasing,
minerals, solar energy sites, and of course, pride of ownership. Biological
growth will probably remain the single largest driver of timberland
investments. Just as all the large owners are impacted, so too will the smaller
owners be affected. There are no havens in this downturn. If you have to sell
now, price can often be hurt by timing and location. We are constantly
providing our clients with the best possible information in order that they can
make the best possible decisions for their investments. We encourage the use of
good professional forestry services. If you are looking for a real estate
company to help you buy or sell, the Broker should be technologically talented
and specifically involved in timberland as their primary business. But whether
you are buying or selling, cash flow is the key to successful investing and
essential for good retirement plans. Be sure you can afford to hold long term
when you buy. Be sure you know what the best price for your land is when you
sell. For the best results you need to be informed and pro active in the entire
process of timberland ownership. If you are not sure what condition your
investments are in, call on the many professionals who constantly monitor the
on going changes in the timberland industry, so your results will be a good
finish!
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