Past, Present, Future Part 3

Examining how forest-based real estate investments are managed

By Dave Skinner

After discussing Plum Creek’s history and its sector-revolutionizing evolution into a Real Estate Investment Trust, or REIT, let’s examine how forest-based real estate investments are managed.

Even before Plum Creek gained IRS approval to become a Real Estate Investment Trust, the company was shifting its strategic focus to real estate and developing a land-management strategy centered on a very important business/investment concept called Net Present Value (NPV) – the value of tomorrow’s dollar today.

As the time between investment and payoff lengthens, NPV becomes ever more important. Real estate, notwithstanding crazy bubbles such as 2000 to 2008, tends to be a long-term play. Timber, while a crop, has long horizons, decades between planting (investment) and harvest (payoff).

So, as Plum Creek CEO Ric Holley explained to investors in 2013: “At Plum Creek, it’s all about net present value and best NPV wins. And everybody understands that […] best NPV wins at Plum Creek.”

Now, with the merger, NPV wins at Weyerhaeuser, too – their “land for sale” page today reads, “Our job as stewards of our assets is to maximize the value over time of every acre.”

How is value maximized? For large forest REITs, the general practice is to classify lands into three basic categories:

Highest and Best Use: These lands, called HBU, have “other values” higher than the long-term value to be realized as working forest. For example, nice lakefront, near town, with good road access, will almost always generate far more cash up front than long-term forestry ever could.

Core: These lands grow trees well, are easy (or at least worthwhile) to manage, well-located, close to paying customers, and unlikely to become HBU land in the near term (say, 20-60 years depending on both tree and human population growth). Core lands are the “keeper” forests, which will generate steady cash forever if managed properly.

Nonstrategic: These lands just don’t “fit.” Maybe the land is isolated, perhaps the forest is “slow,” even unprofitable. Maybe there’s just an idiot buyer ready to pay a crazy-stupid price because they just gotta have it.

This classification is similar to assessing a farm. If possible, farmers like to put the house in a nice spot, that’s the HBU. Irrigated ground is core. The rocky pasture? If you don’t like cows, that’s nonstrategic, which you’ll gladly sell to the rancher next door. Or a developer. If you’re smart, you’re looking at all this “to maximize the value over time of every acre.”

Here’s an example of how Plum Creek broke things out. In 1998, Plum Creek bought 905,000 acres in Maine from Sappi Fine Paper (an integrated South African firm) for $180 million ($198.87 per acre). Sappi had bought these lands from Scott Paper in 1964. The sale included a 40-year supply contract for Sappi’s Skowhegan mill, located in the southwest part of Maine.

In 2005, PCL unveiled a “Concept Plan” for 409,000 acres, approved in 2009. In order to “get” 17,000 acres near famous Moosehead Lake approved for 2,025 “dwelling units,” thereby creating HBU land, Plum Creek had to “give.”

The give was to sell 73,500 acres for $35 million ($476 an acre) to the Nature Conservancy and Appalachian Mountain Club, with an unknown remaining value “donated” by PCL that likely went to reduce taxes. These acres are “nonstrategic,” sold in a “conservation sale.”

Also given were 363,000 acres placed under conservation easement, which isn’t quite as altruistic as people might think. All of that remains timber “core,” fully-working forests, to grow trees and cash as long as the Skowhegan mill or others keep buying wood.

Second, the “conserved land” is now off the table as potential competition for any future developments in the Moosehead region, for example, the other 400,000 acres from the Sappi lands left out of the Concept plan package.

So, that’s how Plum Creek classified its Maine lands to get “best NPV” value for shareholders. With Weyerhaeuser controlling 13 million acres all across America, what do you suppose the experts see when classifying Montana? HBU, core, or nonstrategic? Part, some or all?

Well, we’re about to find out, ready or not.

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