Skyrocketing timberland prices have some people scratching their heads and mentioning the "bubble" word.
On April 1, 900,000 acres of timberland in Arkansas, Louisiana and Texas changed hands for $1.71 billion. Just 17 months earlier, the same land had sold for $1.19 billion.
"I was stunned by the price when I heard it," said Jack Lutz, a forest economist with the Forest Research Group in Alton, Maine.
"I just don't think people can make money growing trees on land at these prices. It just doesn't seem to add up," he said.
In the most recent transaction, TimberStar Southwest, a Shreveport-based real estate investment trust, sold the timberland to third-party investors of the Hancock Timber Resource Group for an average price of $1,900 per acre. Boston-based Hancock is a timberland investment management organization.
On Oct. 31, 2006, Timber-Star had bought the same land from International Paper Co. forroughly $1,322 per acre.
The timberland increased in value by more than 43 percent, despite recent dismal trends in the wood-products industry prompted by slumping demand for housing and chaos in mortgage markets. Since mid-2006, pine sawmills have been closing across the South and prices for pine lumber and saw timber have been dropping.
Court Washburn, Hancock's chief investment officer, said two major factors account for increasing timberland values.
"One is that most timberland buyers are long-term investorsand are looking through the current weak conditions in timber markets and basing their valuation analyses on expectations of longer-term timber price levels," Washburn said.
"Another part of it is that investors are requiring a bit lower return from timberland than had been the case several years ago," he said.
Focusing on prices per acre can be particularly misleading, Washburn said.
"It's difficult to compare different transactions," he said. For example, the share of acreage in plantations as opposed to naturally regenerated forestland may differ. Leases that involve the property are another factor.
Timberland values typically vary depending on the size and quality of the trees, the species mix, harvesting conditions, proximity to mills and local market conditions, said Ben Ballard, a Monticello-based forester with Kingwood Forestry Services Inc.
Land with the potential for so-called "higher and better uses," such as recreational, mineral or urban development, can fetch special premiums. Many ofthe recent large timberland sales also have included 10- to 50-year fiber-supply agreements for associated wood-products mills and pulp and paper mills. TimberStar's purchase agreement, for example, included a 50-year fiber-supply agreement for International Paper's pulp and paper mills, and a 30-year fiber-supply agreement for the company's wood-products facilities, both at market prices. Those agreements now apply to the new mill owners, including Georgia-Pacific LLC and West Fraser Timber Co. Ltd., and to the new timberland owner, Red River Timberlands.
About 230,000 acres of the land recently bought by Hancock's investors - which will be managed through a single investment entity called Red River Timberlands Co. - are in 10 Arkansas counties: Clark, Columbia, Hempstead, Lafayette, Little River, Miller, Nevada, Ouachita, Pike and Polk.
This Arkansas timberland, which has been "managed for intensive timber production by industrial timber companies for many decades," is of especially high quality, Ballard said.
"These lands have very good road systems, well-managed timber stands with balanced age diversity and steady timber harvest potential," he said.
The opportunity to buy such land "does not come around very often," Ballard said.
Pat DuBose, a principal with Little Rock-based Davis DuBose Forestry & Real Estate Consultants PLLC, said he is bullish on timberland because the U.S. housing market eventually will recover.
"Patient money realizes that the [timberland] prices we have today, while they may be high, will not be considered high 10 to 15 years from now, but cheap," DuBose said.
The value of timberland typically depends on the value of the timber it produces as well as the value of the land itself, said Matthew Pelkki, a forest economist at the University of Arkansas at Monticello.
"Since both timber and land values are tied to future markets, conditions and uses, their value is highly speculative," he said.
The trend in timberland divestiture by forest-products companies, which was largely prompted by federal tax-law changes in the mid-1980s, may be a factor in recent valuation increases, Pelkki said.
Timber companies that owned land and processing facilities did everything legally allowable tolower the value of the land they owned for tax purposes, he said. "So, some of the value change seen in the TimberStar-Hancock sale could be due to better valuation practices being applied to the timberlands."
Pete Stewart, president of Forest2Market Inc., a Charlotte, N.C.-based firm that tracks timber prices across the southern United States, said he has difficulty making sense of recent "stratospheric" timberland prices when he compares them to timber prices.
During the past 30 years, southern pine timberland has sold for about 23 times the going price for saw timber, he said. So far this year, the multiple is more than twice that or about 50, Stewart said.
"We've always found it a reasonably sensible measure, albeit imperfect," he said. "Clearly now the relationship is far out of historical norms."
Last year, timberland investments in 16 southern states - from Texas and Oklahoma to Florida and Maryland - returned 18.83 percent, according to the National Council of Real Estate Investment Fiduciaries. The Standard & Poor's 500 index gained 5.49 percent, including dividends.
The southern timberland index, which includes returns fromappreciation and operations, is derived from a pool of 8.8 million acres that are managed by timberland investment management organizations. The average market value of this land is $1,568 per acre.
Increasing returns on this timberland are driven in large part by appraisals, forest economist Lutz said.
"All of these properties get appraised at least once a year," he said.
Mike Clutter, dean of the Warnell School of Forestry and Natural Resources at the University of Georgia at Athens, said a strong annual appraisal was what prompted TimberStar to sell its land.
"Basically, they got made an offer they couldn't refuse," he said.
One simple explanation for growing timberland values is supply and demand, Clutter said.
"There's $10 [billion] or $12 billion looking to find a home invested in timberland, and there's not anywhere near that much [land] available," he said.
Most U.S. forest-products companies have sold their strategic timberlands. Only Federal Way, Wash.-based Weyerhaeuser Co. still has major U.S. timberland holdings, about 6.5 million acres.
The buyers have tended to be large, tax-exempt entities like pension funds, foundations, and college and university endowments, which wanted to diversify their long-term investments. More recently, foreigners have been attracted to U.S. timberland investments because of the weak U.S. dollar.
On Oct. 31, Austin, Texasbased Temple-Inland Inc. sold its 1.55 million acres of timberland - located primarily in Texas and Louisiana, with a smaller portion in Georgia and Alabama - for $2.38 billion. The buyer was an investment entity affiliated with The Campbell Group LLC, a Portland, Ore.-based timberland investment management company.
"There is a limited supply of timberland" and strong demand for it, so a "huge scarcity value" is attached to it, said Steve Holland, a portfolio manager with The Campbell Group, which manages about 20,000 acres in Arkansas.
Timberland is an attractive investment because timber keeps growing and can generate annual cash flow from the sale of logs, he said.
Potential new markets for timberland products, such as cellulosic biofuels (made from plant parts instead of grain or sugar) and carbon sequestration credits,also may be factors in increasing timberland values, Holland said. "Carbon sequestration" is defined by the U.S. Environmental Protection Agency as the process through which carbon dioxide from the atmosphere is absorbed by trees, plants and crops through photosynthesis and stored as carbon in biomass such as tree trunks, branches, foliage and roots.
"Range Fuels has announced a [commercial-scale cellulosic ethanol] plant in Soperton, Ga., and just recently Weyerhaeuser and Chevron have announced a joint venture on biofuels called Catchlight Energy LLC," he said.
Clutter, from the University of Georgia, said "the expectation of some of those markets" is starting to get priced into timberland transactions.
Stewart, from Forest2Market, fears that the "fascination" with such potential new uses for trees may be simply "frothing up" the market.
"Very, very little of that has materialized into real money for landowners," he said.
Business, Pages 82, 91 on 05/18/2008