domestic timber investments - grant's interest rate … saul fall 2012.pdfgmo accounts will be...

Domestic Timber Investments October 23, 2012 Bob Saul

1 GMO BS_Grant _RR_10-12

Proprietary information – not for distribution. Copyright © 2012 by GMO LLC. All rights reserved.

Presenter

Robert Saul Mr. Saul is the Director of Northern Hemisphere Investments for GMO RR and is responsible for all U.S. and Central American investments in client portfolios. He joined GMO RR in 1998, and is primarily responsible for a portfolio of properties located in all major wood growing regions of the United States as well as Costa Rica and Panama. Prior to joining GMORR, Mr. Saul established the first large scale hardwood plantations in New England. He earned his B.A. in English from Amherst College and an M.P.P. from Harvard University.

Domestic Timber Investments:

– How?

– Where and When?

– What Happened and Why?

and

– Why not now?

1.   Magnitude and timing of expected cash-flow

2.   Security of expected cash-flow

3.   Duration of growing season

4.   Property carrying costs

5.   Flexibility of land use

6.   Operability of land base

7.   Site productivity

8.   Transportation Options

9.   Market Diversity

10.  Country risk

How?

The Basics: Factors Used to Assess Timberland Value



Where? The U.S. Timberland Universe: 350 million forested acres in the United States

Source: National Atlas of United States



Then Subtract

!  California

!  Public lands

!  Low Rainfall and Slow Growth Regions and Species

!  Inactive or non-competitive Stumpage Markets

!  Regions that are vulnerable to Climate Change

!  Regions that are population dense (HBU intensive)



And you get about 210 Million Private Forested Acres Total market cap of about $100 billion

Source: National Atlas of United States



When?

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Acr

es (0

00's

)

U.S. Timberlands Transactions by Seller Type

GMO RR Industrial Government Financial/REIT Conservation

70% of legacy industrial acres changed hands between 1996 and 2007

A brief history of recent market activity: Industry Selling

Source: RISI, GMO



Financial Investors and REITs Buying

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Acr

es (0

00's

)

U.S. Timberlands Transactions by Buyer Type

Industrial Government Financial/REIT Conservation

Source: RISI, GMO



What happened? Housing starts decline and log prices follow

Source: TimberMart South, U.S. Census

-

5

10

15

20

25

30

35

40

45

50

-

500

1,000

1,500

2,000

2,500

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Pine net stumpage (U

S$/ton, nominal)

Hou

sing

Sta

rts

(m

illio

ns, s

easo

nally

adj

uste

d, a

nnua

lized

)

Housing Starts vs. Southern Pine Log Prices

U.S. Housing Starts Pine sawtimber Pine Chip-n-saw



U.S. Timberland Growth vs. Drain

120

122

124

126

128

130

132

134

-

1

2

3

4

5

6

7

8

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Privately-owned saw

timber inventory:

Board feet (billions)

Gro

wth

/Dra

in: B

oard

feet

(bill

ions

)

Softwood Sawtimber Inventory U.S. West Coast

Growth Drain Standing Inventory

Source: Forest Economic Advisors

Note: “Drain” is harvest and loss to HBU conversion



245

250

255

260

265

270

275

280

285

290

-

5

10

15

20

25

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Privately-owned saw

timber inventory:

Board feet (billions)

Gro

wth

/Dra

in: B

oard

feet

(bill

ions

)

Softwood Sawtimber Inventory U.S. South

Growth Drain Standing Inventory

Note: “Drain” is harvest and loss to HBU conversion


U.S. Timberland Growth vs. Drain



Southern Pine Prices

0

5

10

15

20

25

30

35

40

45

Net

stu

mpa

ge ($

/ton)

Southern Pine Prices : Regional Avg. (2001 to Q2-2012)

Pine Sawtimber Pine Chip-n-Saw

Source: Timber Mart South



North American Processing Capacity: SW Lumber

64

66

68

70

72

74

76

78

80

82

84

-

5

10

15

20

25

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Total N.A

. Capacity (billion board feet) R

egio

nal C

apac

ities

(bill

ion

boar

d fe

et)

North American Softwood Lumber Capacity by Region (2001-2012)

U.S. (West) U.S. (South ) U.S. (North) British Columbia Canada (East) Total N.A. Capacity




North American Processing Capacity: Plywood

-

5

10

15

20

25

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Cap

acity

(mill

ion

sq. f

eet,

3/8

in. b

asis

)

North American Plywood Capacity by Region (2001-2012)

U.S. (West) U.S. (South ) Canada Total N.A. Capacity




North American Processing Capacity: Pulp

0

10

20

30

40

50

60

70

80

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Shor

t ton

s (m

illio

ns)

U.S. Pulp Capacity (2001-2012) West North Central Northeast South




Softwood Sawlog Exports: North America

0

1

2

3

4

5

6

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

m3

(mill

ions

)

U.S. & Canada SW Sawtimber Exports (2001 - 2011)

U.S. SW Sawlog Exports Canada SW Sawlog Exports

Source: USDA FAS GATS, B.C. Stats Ministry of Labor



Today’s Market for Timberland Assets

!  Disconnect between buyers (7% + discount rate) and sellers who sit on “market-based” or, internal appraisal valuations using discount rates at or below 5.5%

!  Transaction sizes MUCH smaller than the “great monetization” of 2002 to 2008

!  Hard to place significant institutional capital efficiently

!  Very little transactional data available to help read the market

!  More difficult to do a deal with a financial seller/buyer combination than an industrial/financial seller/buyer combination

Why it is too early to invest in U.S. timberland?

All Eyes Turn to the U.S. Housing Market



Consensus Anticipates a Strong Recovery in Housing Starts

Source: Census Bureau. Consensus numbers are calculated using an average of estimates from BofA, NAR, NAHB, Deutsche Bank, Fannie Mae, Freddie Mac and Blue chip survey As of July, 2012



50

70

90

110

130

150

170

190

210

230

1971 1976 1981 1986 1991 1996 2001 2006 2011

NA

R A

ffor

dabi

lity

Inde

xAffordability is Near Record Highs

Source: National Association of Realtors As of September, 2012



But Household Formation Remains Well Below the Long-Term Average

Source: US Census Bureau As of September, 2012

*Note: Estimates for household formations are not included where adjacent years are non-comparable.

0

200

400

600

800

1000

1200

1400

1600

1800

20001983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012e

Hous

ehol

d Fo

rmat

ion

(000

's)

*



A Fifth of all Homes are Still Underwater

0%

5%

10%

15%

20%

25%

2006 2007 2008 2009 2010 2011 2012

% o

f Hom

es w

ith G

reat

er th

an 1

00%

LTV

Source: Amherst Securities As of September, 2012



For Over 40% of the Population, Selling the House Doesn’t Make Financial Sense

Source: Amherst Securities As of September, 2012



Rising Incomes Supported Housing Demand

Source: Census Bureau As of 2010

42,000

44,000

46,000

48,000

50,000

52,000

54,000

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010

Real Median Household Income - 2010 $



25,805 40,628

22,743

44,718 21,754

38,063

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

1980 2011

000s

US Population by Age35-44 45-54 55-64

57%

97%

75%

Historically, Baby Boomer Growth Has Had a Significant Impact on Housing Demand




Lower Employment Opportunities for Younger Generation

Source: Bureau of Labor Statistics As of 2010

60

65

70

75

80

85

40

45

50

55

60

65

1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

25-34 (%)16

-24

(%)

Civil Employment to Population

16-24 Left Axis

25-34 Right Axis



10,000

12,000

14,000

16,000

18,000

20,000

22,000

24,000

26,000

28,000

30,000

2005 2006 2007 2008 2009 2010 2011 2012

Average Student Loan Debt. Current Dollars

Under 3030-39

12% of Gross Monthly Earnings,if paid in 10 years*

High Indebtedness Impairs Baby Boomers’ Ability to Buy Homes

*Gross monthly earnings: Fed Reserve of Kansas City paper: Student Loans: Overview and Issues. Monthly Gross Earnings: $2,500. Other assumptions for calculations: Average debt payable in monthly installment over 10 year period. Average interest rate: 6%

Source: Federal Reserve Bank of NY As of 2012



6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

1982 1986 1990 1994 1998 2002 2006 2010

000s

Homes Owned By Age Group

35-44

45-54

55-64

Boomer Influence on Housing is Waning




0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

0

500

1,000

1,500

2,000

2,500

3,000

1966 1971 1976 1981 1986 1991 1996 2001 2006 2011

Cum

ulative Excess (thousands)

Hou

sing

Sta

rts/

Hou

seho

ld F

orm

atio

n (th

ousa

nds)

Excess Inventory

Total Housing StartsHousehold FormationCumulative Excess

Excess Inventory: New Housing Starts in Excess of Formation

3m excess houses (excluding 2nd, seasonal or obsolete homes)

Source: US Census Bureau As of 2012



Source: Mortgage Bankers Association. Amherst Securities, Laurie Goodman As of September, 2012

Excess Inventory: Shadow Inventory

Delinquency Status # of Loans % of

Loans

Weighted Average Mark-to-

Market LTV

Non-Performing Loans 3,956,055 7.8% 116.5%

Re-Performing Loans 3,962,977 7.8% 105.3%

Always Performing Loans: MTM LTV > 120% 2,195,309 4.3% 146.7%

Always Performing Loans: MTM LTV b/w 100-120% 4,711,459 9.3% 107.0%

Always Performing Loans: MTM LTV < 100% 35,843,705 70.7% 70.1%

Total 50,669,505 100.0% 0

2

4

6

8

10

12

1979 1987 1995 2003 2011

Percentage of Loans in Foreclosure or 90+ Days

Delinquent

Foreclosure90+ Delinquent

About 15m houses are high risk. 30% of these could come

to market



Excess Inventory: A Normalization of Home Ownership Rate

Ownership rate declining to 64% means 2.5m homes at risk

Source: US Census Bureau As of July, 2012

59

60

61

62

63

64

65

66

67

68

69

70

1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Home Ownership Rate (Percentage)



Can Home Prices Fall any Further?

Source: US Census Bureau, FHFA House Price Index



Are There Ways to Play this Market?

!  Buy young forests with long dated maturity

!  Invest in species with good supply /demand dynamics over the coming decades (Black Walnut?)

!  Accept lower rates of return (3% real) on commodity softwood investments

!  Wait until 2018 when many industrial supply agreements lapse and many timber funds sunset and housing market fundamentals improve.

Or, you could start now and build your own forest.



The information presented herein is provided for discussion and information purposes only. No offering of interests in any fund (a “Fund”) managed by GMO Renewable Resources, LLC (“GMO RR”) is made or implied as a result of the circulation hereof, and under no circumstances is this presentation to be used or considered as an offer to sell or a solicitation of an offer to buy, any security. Any such offering may be made only by a Fund’s Confidential Memorandum (the “Memorandum”) and the definitive provisions provided for in the Limited Partnership Agreement, Subscription Agreement and/or other operative documents of the relevant Fund. This presentation is not intended to be relied upon as the basis for an investment decision, and this presentation is not, and should not be assumed to be, complete. In making an investment decision, prospective investors should conduct their own investigation and analysis of the data and descriptions set forth in this presentation and must rely on their own examination of the investment opportunity, including the merits and risks involved. Certain of the economic and market information contained herein has been obtained from published sources and/or prepared by third parties. While such sources are believed to be reliable, none of GMO RR, any Fund managed by GMO RR, or their respective affiliates, employees and representatives assume any responsibility for the accuracy of such information. These presentation materials, together with any other information that may be furnished to prospective investors may contain forward-looking statements within the meaning of the U.S. federal securities laws. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. For example, forward-looking statements may predict future economic performance, describe plans and objectives of management for future operations and make projections of revenue, investment returns or other financial items. A prospective investor can generally identify forward-looking statements as statements containing the words “will,” “believe,” “expect,” “anticipate,” “intend,” “contemplate,” “estimate,” “assume” or other similar expressions. Such forward-looking statements are inherently uncertain, because the matters they describe are subject to known (and unknown) risks, uncertainties and other unpredictable factors, many of which are beyond GMO RR’s control. As such, actual results may differ materially from those reflected in such forward-looking statements. No representations or warranties are made as to the accuracy of such forward-looking statements. The return data for investments set forth herein is for informational purposes only. It has not been audited or otherwise verified by any outside party. The past performance of the accounts managed or controlled by GMO RR may not be indicative of the results that any current or future account may be able to achieve. Furthermore, the nature of, and risks associated with, any account’s investments may differ from those investments and strategies undertaken historically by GMO RR with respect to other portfolios or investment vehicles that it manages. There can be no assurance that any current or future account’s investments will perform as well as past investments by GMO RR or that any such account will be able to avoid losses or that any such accounts will be able to make investments similar to past investments managed by GMO RR. The information presented herein is proprietary and confidential, may contain commercial or financial information, trade secrets and/or intellectual property of GMO RR and/or its affiliates, and may not be reproduced or distributed without the express written consent of GMO RR. If this information is provided to an entity or agency that has, or is subject to, open records or open meeting laws or similar or related laws, rules, regulations or policies that do or may permit disclosure of any portion of this information to any person or entity other than the entity to which it was provided by GMO RR (collectively, the “Sunshine Laws”), GMO RR hereby asserts any and all available exemptions, exceptions, procedures, rights to prior consultation or other protection from disclosure which may be available to it under applicable Sunshine Laws.

Note

40 Rowes Wharf

Boston, Massachusetts 02110 (617) 330-7500 | www.gmo.com

GMO North America | Europe | Asia-Pacific

domestic timber investments - grant's interest rate … saul fall 2012.pdfgmo accounts will be...

Documents