Bret Vicary, PhD, MAI Vice President

Understanding Risk in Global Timberland Investing

Presented at:

SECOND ANNU AL

Forest Products and Timberland Investment Conference March 31-April 1, 2015 | New York, NY USA

US Timberlands – The Benchmark

US funds major source globally

Very diverse timber markets

Extremely diverse forestland markets

Low risk low required return

Investors seeking higher risk-adjusted returns have sought offshore diversity.

US Timberlands – Great Diversity

Timber marketsPulpwood, CNS, sawtimber, veneer, poles, biomass

Pine straw, maple products, tipping leases

Great inter-regional diversity – species, planted vs. natural …

Forestland markets – multiple uses

Timber production

Recreation – leases, sales

Kingdom buyers – timber, recreation

Wetland mitigation banking / Carbon

HBU values- small tracts, aesthetics, second homes

Conservation buyers – freehold, easements

Mineral interests

US Timberlands – Infrastructure

PhysicalRoads – Rail – Ports

Quality logging & trucking force

Large Scale

Cost effective, little or no management dilution

Investment

TIMOs – Timber REITS – Private equities – Pooled vs. Direct

Legal, consulting, financial services

US Timberlands – Legal / Security

LegalStrong property rights

Verifiable property title

Transparent legal & court systems

Political / Corruption risks low

Stable currency

Income tax – zero for domestic TIMOs

Not so favorable for taxable entities

Other “Mature” Timberland Markets

Tier 1 – Australia/NZ, Chile, CanadaAustralia/NZ – pine/euc, safe, spotty exports offer currency hedging. Tasmania diverse but much more risky.

NZ – mostly radiata pine, safe, hedge currency w/exports

Canada – diverse native forests, mills spotty, exports solid

Tier 2 – Brazil, UruguayLimited diversity (Euc, Pine, Teak plantations)

Scale with world-class mills

Instability poses challenges for foreign owners

Native rainforest concessions are another matter

Lack diversity – score fairly well otherwise:

“Emergent” Timberland Markets

Tier 1 – Panama, Eastern EuropePanama – entirely export-driven (teak), dollarized economy, friendly to foreigners, scale/road infrastructure challenges

E Europe – diverse forests & markets, variable exposure to corruption but strides being made, attractive to W Europ. Funds (familiarity lowers perceived risks)

Tier 2 – Central AmericaCosta Rica, Nicaragua, Guatemala

Teak driven

Scale challenging

Corruption & transparency issues

Native timber not attractive

Diversity & scale can be challenging:

“Frontier” Timberland Markets

Africa, SE Asia, China, Native Tbr. Concessions – challenges:

Market depth / Econ. Stability

Infrastructure – Physical, Legal

Scale / Mgt Dilution

Mgt & Accounting Controls

Corruption / Property rights

Access to professional services

Currency risk

Liquidity on exit

Sewall 2014 Investor Survey

19 “Active investor respondents

TIMOs, Pensions, Endowments, REITs

US base discount rate for US assets

Down 25 bpts to 5.5% real, pre-tax, pre-TIMO fees

Capital more available – est. USD 4-5 billion

Sustained housing recovery – 1.5M starts by 2017

Cautious optimism

Marked increase in 2014 global sales

Carbon markets remain ephemeral

Return to 1.5M housing starts in 2017?

Sewall Investor Survey - 2013

World Bank Ease of Doing Business  

Corruption Perceptions

Index3 NZ 14 USA 1910 U.K. 1411 Australia 916 China 8017 Lithuania 4319 Canada 924 Latvia 5334 Chile 2241 S Africa 72

New Zealand – radiata pine

Exports add diversity, hedge currency

Predictable yieldsand good scale … but basically

a 1-species show

Romania – native hardwood

High-quality hardwood, species & market diversity

Progress with regulations,enforcement, business

models … & a few opportunitiesfor scale

Latin America – super treesEuc. in Brazil - how old?

Teak in Panama …

Verifying age& yield

Tasmania – native hardwood

Unstable gov’t leadership,intense social pressures…

Non-investible climate bysome accounts (Sewall Survey)

Volatile market situation – Uncertain future for mills &

resource base

USA – Timber & Forestland Markets

VermontSugar-bush

Georgia pine straw

Maine timber & HBU

PacificNW

youngforest

Due Diligence & Valuation Challenges

Evaluating riskInventory & GIS

Timber yields | Markets | Legal-Political

Losses from: Pests | Disease | Fire | Weather

Potential for Scale | Exit options

Who else will bid?

Comparable transactions analysis – Market Value vs. Investment Value

IFRS – Round peg in square hole CHAOS!

Violates Principle of Consistent Use Ponzi schemes?

Technology & precision may not enhance returns.

Challenge creates opportunity.

End

SEWALL – since 1880BRET P. VICARY, PH.D., MAI

Vice President, Forestry & Natural Resources+1.207.827.4456 | m +1.207.745.1926

bret@jws.com

Forestry Consulting offices:Old Town, METhetford, VTCharleston, SCInternational Falls, MN

Biosketch

Bret P. Vicary, Ph.D., MAI, LPF | Vice President Forestry & Natural Resource ConsultingJames W. Sewall Company – Old Town, ME | USAoff +1 207.817.5447| mob +1 207.745.1926 | bret@jws.com | www.sewall.com

 Dr. Vicary provides forestland investors with valuation and due diligence services throughout the Continental U.S., Hawaii, Canada, Europe, Latin America, Africa, Australia, and New Zealand. Clients include timber investment management organizations (TIMOs), REITs, pension funds, forest industry, private equities, family investors, lenders, attorneys, public agencies, and conservation groups.

An author and frequent speaker, Bret specializes in timberland investment analysis & appraisal, conservation easements and timber tax litigation. He holds the Appraisal Institute’s MAI designation, is a Faculty Associate at the University of Maine where he earned his PhD in Forest Economics, and is the principal author of the NCREIF Timberland Committee’s “Best Appraisal Practices.”

Sewall’s Forestry & Natural Resource Consulting group, with offices in Maine, Vermont, South Carolina, & Minnesota, is the oldest in North America, dating back to 1880. It provides valuations and due diligence for some $20 billion in forest assets worldwide each year.

Sewall forestry services: appraisal & investment analysis | investment counseling | forest inventory | growth & yield modeling | harvest scheduling | forest management | economic analysis | resource studies | training | litigation support | GIS & mapping | photogrammetry