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Rescooped by Jack D Bridges from Timberland Investment
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A New Rayonier, But The Same Old Problem

A New Rayonier, But The Same Old Problem | Risk-Adjusted Returns | Scoop.it

For the major publicly-traded timberland owners - a list that includes Rayonier (NYSE:RYN), Plum Creek (NYSE:PCL), Weyerhaeuser (NYSE:WY), Pope Resources (NASDAQ:POPE), and Potlatch (NASDAQ:PCH) - the frustrating wait for a housing-led recovery goes on. Although Rayonier does have a relative advantage to Plum Creek with its larger (as a percentage) weighting to the Pacific Northwest and its New Zealand joint venture, not to mention the absence of wood products operations, the company can do relatively little in the face of persistent weakness in stumpage prices and sluggish demand for HBU real estate.

***

Earlier this year, Rayonier completed the spin-off of Rayonier Advanced Materials (NYSE:RYAM), the company's former specialty cellulose, ethers, and pulp business. Now, Rayonier is effectively a timberland pure-play - owning about 2.1M acres of U.S. timberland, another 200K acres designated as HBU land (to be sold for its real estate value), and more than 300K acres in New Zealand owned through a 65% interest in a joint venture with Matariki that focuses on Radiata pine for Asian export markets.

 

Unlike Weyerhaeuser and Plum Creek, Rayonier does not have a wood products operation. I'd call that a mixed-to-positive factor for the company. These wood product operations (which manufacture products like lumber, plywood, and engineered structural products) can generate pretty good cash flow when residential building activity picks up, but they typically command lower multiples than timberlands on a "dollar for dollar" basis.
***
Timberland operators are sort of stuck right now - because the equity markets assign a lower per-acre value to timberland acreage than actual real-time private transactions, acquiring more timberland now is a tricky move. Rayonier doesn't really need to acquire more land, particularly since it sold its lower-value Northeast lands in 2013, but adding more higher-value land in areas like the Pacific Northwest wouldn't be terrible. All told, though, Rayonier's best move is just to manage its harvests appropriately, take advantage of new opportunities to sell pulpwood (like for wood fuel pellets), and wait for prices to improve.


Via Sam Radcliffe
Jack D Bridges's insight:

https://www.youtube.com/watch?v=9MiO-2Qnm8M

 

It's a simple question: What if this is as good as it gets? Please apply that to the current state of the housing market (or at least the rate for new construction of single-family homes in the US).

 

We've had artificially low interest rates for how many years now? How many rounds of asset purchases & market operations by the Fed, along with a $4 Trillion balance sheet supporting our financial system? Given this backdrop, what if this is as good as it gets?

 

I don't mean to imply that the US will never see 1.5M housing starts again. No. I just think it's folly to consider this the baseline case, as many analysts and timber REIT CEOs think. This lot seems to forget the massive credit bubble, and how it disproportionately fed into home construction & the housing market in general (and don't forget the Fannie / Freddie role in supporting the push for homeownership, either). 

 

Now, even if the housing market doesn't catch fire again, what does this mean for timberland owners? Since wood baskets are hyper local, it really depends on where one looks. For the PNW, as long as China / Japan / Korea need fiber, and it remains a desirable place to live, the market dynamics shouldn't change a whole lot. It's a very competitive marketplace--with industrial users, TIMOs, and land conservancies all jockeying for prime land.

 

For the SE, broadly speaking, a slow uptrend or steady annual home starts number might mean more deferred harvests. Or, as Sam Radcliffe keenly observes, it could see large investors in the timber REITs to clamor for unlocking value in other ways (M&A). 

 

I'm not so sure Wall Street is keen to pursue hostile take-over & unwinds of such varied assets as the timber REITs. Why? The public / private valuation per acre spread that Sam notes isn't a simple thing to arbitrage. It would take loads of capital--and even more time.

 

Even if one stores value on the stump during the liquidation of hundreds of thousands of acres, such a wave of sales would surely depress prices in the short-to-intermediate term. I suppose the cost savings from downsizing from a public REIT (bye-bye investor relations staff, a huge HR department, etc.), might help--especially if one chops the salaries of those in charge of this mighty unwind.

 

But, the purchase and profitable parsing of a huge timber REIT is beyond what most I-banks are equipped to do these days. Those guys would much rather play stalker to unprofitable start-ups in Palo Alto for a chance at the next hot IPO. Wall Street gets much higher fees for crafting myths and telling tales about unicorns, than it does for selling transparent, sober businesses like forest product concerns. 

 

Thanks again to Mr. Sam Radcliffe (prentissandcarlisle.com) for starting yet another interesting discussion. I'm sure it's one we'll revisit again in the future.

 

JDB

 

 PS. If any bankers happen to read this, and want to pitch buying / unwinding a timber REIT, don't hesitate to get in touch. I'm looking for a job at present, and would be happy to consult on such a massive undertaking. Seriously.

 

 

 

 

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Sam Radcliffe's curator insight, August 25, 5:02 PM

"Timberland operators are sort of stuck right now - because the equity markets assign a lower per-acre value to timberland acreage than actual real-time private transactions." Where have I heard that before? Oh, that's right, it was the reason Sir James Goldsmith targeted timber companies for hostile takeovers in the 1980's. It was the reason Wall Street pressured timber companies to divest of their timberlands in the late 1990's and early 2000's.


I happen to agree entirely with the observation that equity markets are assigning a lower value than private transactions would bring. Given the amount of institutional dry powder right now, might that suggest the time is ripe for a hostile run at the timber REIT's? The rationale has already played out twice in the last thirty years.

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Plum (PCL) Tones it Down-- CEO R. Holley says housing market still "anemic"

Plum (PCL) Tones it Down-- CEO R. Holley says housing market still "anemic" | Risk-Adjusted Returns | Scoop.it
Jack D Bridges's insight:

What follows is a quick look at Plum Creek's (PCL) Q2 Conference Call. 

 

On the housing market, Mr. Holley strikes quite a different tone than he did in early 2014. To wit, we'll call this section humble pie.

 

Mr. Holley begins, "The economists have moderated their growth expectations for residential construction this year, in part due to the lackluster activity during the first six months of the year."

 

Holley continues, "As housing demand improves, we expect to see increased lumber demand and increased lumber production and log prices in the U.S. South. However, the overall pace of demand growth in 2014 is not as robust as originally expected and we have moderated our price growth expectations to Southern sawlogs in the second half of 2014.

 

This reduced view of demand / pricing in the US South is why PCL is deferring so much previously planned harvest (500K--1M tons deferred, in fact).


In Holley's own words, "With this in mind, we have chosen to defer a portion of our sawlog harvest to certain other southern micro-markets and as a result we now expect our harvest to be at the low end of our 20 million to 21 million tons harvest range we gave you at the beginning of the year. The great thing about timber is that we are not foregoing this income or cash flow; we are simply delaying its delivery."

 

And, while my thoughts on the SE cabal of optimists are well known, this isn't a bad move for Plum, given their views of the future. I just think we'll see more unscheduled deferrals when the Southern Sawlog revival keeps getting pushed out another year at a time.

 

So, what does Mr. Holley feel is ailing the housing market?

 

Steven Chercover- DA Davidson

Go it. And then finally, would be willing to hazard a guess as why the housing recovery in so anemic; is it lack of lots of labor jobs or policy?

 

Rick Holley - Chief Executive Officer

All the above. We want to learn that from your guys, but no, I think it’s all the above. I just think it’s a jobs thing, it’s a housing formations thing, it’s still tough for young couples to get a mortgage and then they are trying to improve some of that. The outlook for most people and job out don’t feel good to people, so I think it’s why I can come up with a better word; it’s anemic. It’s just kind of, it’s not there yet. So it’s a combination of all the above.

 

And, then Mr. Holley addresses the broader timberland marketplace in the US: 

 

Rick Holley - Chief Executive Officer

There is still at any point in time, two or three or four five transactions in the market place, generally kind of 40,000 to 60,000 acres. A lot of the TMOs are bringing some lands outs of the funds that they’ve had over time and bringing them back to market. So a lot these are in the U.S South and we look at all of them and as the question was asked earlier and the ones that have transacted generally been north of $2,000 an acre and I think it’s justifiable given the productivity, a lot of those properties that they have come to market.

 

I think one of the things that a lot of investors probably, or just even Plum Creek for a long time maybe we are behind on is how productive these lands are with some of the silvicultural treatments that we’ve all put in place over the last couple of decades, and how much cash flow they are going to generate off that productive and then you start to see a better pricing  environment. You can clearly justify our per acre number with a two in front of it.

 

But there’s always a few things in the market place and I think they seemed to get snapped up pretty quickly, so there’s still lot of capital looking at those.

 

Moving onto Rick Holley's thoughts on rural / raw land markets:

 

Rick Holley - Chief Executive Officer

Well, one of the comments that I made in my prepared remarks today was that some of the markets that have been pretty dormant the last several years like Montana have kind of lit up again, so we see a lot more interest in lands in some of those areas. A lot of the buyers are places from like Texas. Some of those market places are looking at Montana now.

 

Clearly we see a lot more recreational interest in the south. Values still aren’t where we expect them to be longer terms, so we’ll be pretty stingy about selling a lot of these higher various properties in the south, but we are starting to see some movement in the market place and prices are starting to recover a bit.

 

But we’re very pleased to see Montana, because it was a great market a number of years ago as you know and it just went to sleep for the last years. It’s awake now, so that’s a positive trend.

 

Wrapping it up:

 

Me again. In keeping with my recent post about the Rodney Dangerfield-like treatment of the Lake States region, the Plum conference call barely even mentioned the northern resources segment at all--excluding the planned Wisconsin divestiture which closed this summer. 

 

Looking at the equity market reaction to Plum's reduced harvest forecast (and lowered profit / revenue for the remainder of 2014), the stock was off about 3% after-hours. The damage should be mitigated by the accretive value of the 500K MWV acreage Plum diluted shareholders to buy.

 

But, it also bears mentioning how many shares of PCL are shorted--some Wall St. types think betting against Plum is a good way to short the housing market. There are better ways to execute this view--and whatever I think about management's housing forecast, I wouldn't want to bet against Plum Creek. Maybe if the equity market ever corrects, it does drop below $40 for a little while. We also know that's the magic number where Mr. Holley starts talking about buying back stock. 

 

Here is the full Plum CC transcript link:

 

http://seekingalpha.com/article/2350265-plum-creek-timber-company-pcl-ceo-rick-holley-discusses-q2-2014-results-earnings-call-transcript?part=single

 

And, what a 10-year chart of Plum Creek equity looks like--

 

http://screencast.com/t/7u9qwBibAbu

 

JDB

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The Forests of Fly-Over Land: Life as The Rodney Dangerfield of Timberland Investment

The Forests of Fly-Over Land: Life as The Rodney Dangerfield of Timberland Investment | Risk-Adjusted Returns | Scoop.it

Paul Quinn - RBC Capital Markets
Okay. And then Mike you mentioned a number of timber sales that you’re taking a look at right now, is that -- would you describe the current market as more sales out there and what’s the general flavor in terms of competitive pressures?

 

Mike Covey - Chairman and CEO
I think that especially the southern timberland market is as competitive as it’s ever been at least in the last five years or six years that I can remember. Certainly since the downturn, I think we are seeing higher prices and more competitors than we’ve ever seen both from the suite of weak competitors as well as (indiscernible). And there are only a handful of properties for sale. There is -- I don’t know by handful there is probably half a million acres on the market and half a dozen transactions. So they are small, there is not many of them and they are extremely competitive.

 

Paul Quinn - RBC Capital Markets
I think that increased competition has pushed up transactions values. I mean we really haven’t seen that many transactions. I mean there was one closed I guess the Catchmark sale in Q1 that was over 2000. Is 2000 an acre now sort of the new norm in the US now?

 

Eric Cremers - President and COO
Well, the price per acre heavily depends on stocking and quality of the timber and proximity to markets. So it’s hard to just pick one number, but certainly the large Plum Creek transaction with (indiscernible) and the Catchmark transaction that was completed in Q1, those were approximately $2000 an acre which have been higher than what we’ve seen in the past. But you could also see something trade for $1500 an acre which might be an extraordinary price if it was poorly stocked. So it’s hard to say that 2000 is new norm.

 

Mike Covey - Chairman and CEO
Paul, I think part of what’s driving those higher prices that we are seeing is there is more conviction that there is going to be a housing recovery in the U.S. If you look at forward demand for lumber going up 4, 5, 6 billion board feet a year. Almost everybody agrees that’s got to come from the U.S. south. So price curves for saw logs in southern yield pine continue to strengthen. And with more conviction of there being a housing recovery, it’s pushing discount rates down. Those two combined factors and what’s driving those higher values.

 

Paul Quinn - RBC Capital Markets
Okay. And we are seeing some price appreciation in different parts of the U.S. south on the pine saw log side, but you are not seeing any in Arkansas. Is it more to do with just the growth versus drain ratio in that -- in your jurisdiction?

 

Eric Cremers - President and COO
It’s probably that, the growth versus drain, as well as just the dynamics of the sawmill and plywood capacity, that’s installed in the area. Ad I think as you go to coastal and central Georgia, the Carolinas, North Florida, parts of Texas there is just a more robust market for lumber and plywood producers than is south central Arkansas where we’ve seen a fair amount of idle capacity.
***
Collin Mings - Raymond James
Okay. All right. And then just one other follow-up, just on the share repurchase. I’m just curious, I mean, some of your peers have gone as far as offered a specific trigger point on the share price that they see where they might get more aggressive. And I know that’s probably not something you guys would love to do but just can you talk a little bit more about maybe the dynamics where as you alluded to where that’s kind of the bottom of your capital allocation priorities. What might happen or what way you might see the move that up the stack a little bit?

Particularly just give me some of the challenges as Mike you alluded to with how competitive it remains for Timberland acquisition. And again as I look your stock trading at discount to NAV, it seems like there is some value there and repurchasing your own timber, if you will this type of discount?

 

Mike Covey - Chairman and CEO
Well, we don’t dispute. We certainly believe, we traded at a discount to NAV and certainly in this market, perhaps buying our own trees through our own stock is one of the more attractive alternatives that we have for the use of capital, but I also think the landscape related with people who do share buybacks that have not got that right in hindsight.

And our board has been very conscious about that. And I think it’s just as a matter of priority, kind of work through and said capital allocation to our wood products business, dividend increases and acquisitions are higher priorities in share back. That’s not that we’re going to rule them out but they are just at the bottom of the stack. Well, when moving to the top of the stack, obviously is a major retraction. I think in our share price for whatever reason -- for the below NAV than it is today and then certainly we do revisit with board.


Via Sam Radcliffe
Jack D Bridges's insight:

Considering the Potlatch discussion of the "competitive" timberland markets in the US Southeast, let's turn to a similar issue: Why are large investors ignoring or overlooking the Lake States timberland market? 

 

Sam Radcliffe of P&C (www.prentissandcarlisle.com) has addressed this before, but it's an interesting issue. For starters: 

 

1) The wood basket as a whole has nearly no export markets, unlike the PNW and SE, which give the regions a better margin of safety during recessions / times of lower domestic demand / pricing. S. Radcliffe could probably quantify this fact, but let's just say for those who do not defer harvests during recessions--or owners exposed to closing mills / poor pulp demand / or delivery economics--it matters.

 

2) Due to demographics, on aggregate, HBU values are typically lower in the Lake States (though, not always) Why? In the Lake States, almost 40% of timberland ownership is comprised of state, county, or federal agencies; in the SE wood basked, that number drops to 5.5%. (source: http://www.keweenaw.com/pdffiles/2nd-2014.pdf, page 2).

 

So, this complicates things for owners of timberland in the Lake States; it can weaken HBU potential for certain properties (timberland is abundant for recreation, due to the ample state / national forest lands open to the public); conservation easements become tougher to "sell;" since forested buffer zones are abundant; demographics precludes raw or recreational land values from reaching prices seen in other timber regions (Pope Resources land outside Seattle; Plum Creek's lands near Gainesville, etc.).

 

3) Despite no export markets, and lower average HBU potential, high-grade Northern Hardwood sawtimber (Hard Maple, Cherry, Walnut, etc.) is a valuable commodity. And yet, Northern Hardwood wood baskets are generally not as well understood by investors. This is S. Radcliffe's point from his excellent presentation, found here: 

 

http://www.myminnesotawoods.umn.edu/wp-content/uploads/2013/12/TIMOs-REITs-the-new-face-of-industrial-forestry-v2.pdf

 

(I think Sam is spot-on about this--and I suggest reading more of his writing on the subject.)

 

But I digress...so the industrial and institutional marketplace for Lake States timberland is smaller, while in the SE and PNW there are more players chasing fewer assets. This, in turn, impacts prices accordingly.

 

These are just 3 brief reasons why investors (and industrial owners, like Plum Creek, Rayonier, and others) overlook the Lake States. What could change this? 

 

Since I've invested in the Lake States region personally, and for others for quite a long time, this issue is something I kick around a lot. From my perch the answer is simple: A region wide effort by timberland stake holders, green power advocates, and policy makers, to develop infrastructure to support biomass for power generation. 

 

Now, this will draw cries from those who argue biomass is impractical or even uneconomical in many cases. Without subsidies or federal support, perhaps. But, many "new" industries with some tangible benefits for all (cleaner air) get a nudge from the public--as long as the 'support' has roots in economic reality, and doesn't completely pervert sound market principles. 

 

This is not a new idea, either. In the recent past, several projects proposed building $12M+ pellet plants (fed by wood waste, tree tops, etc.) which would then supply regional power generators. Unfortunately, the energy suppliers had no incentive to spend huge sums retrofitting their plants to support a more carbon-friendly raw fuel, without incentives from state & federal agencies. So, no tax breaks to help ease the blow of capital costs = no new revenue stream for timber companies / crews to use waste = no joint ventures to build scalable pellet plants.

 

My question is this: Where is the initiative among the timberland / forest products crowd to invest in making this a reality? It would create a few jobs, take waste products and turn them into fuel, and help reduce the amount of coal burned by Lake States power concerns. 

 

It's easy to see why this hasn't happened, though. The effort involved to create a modest economic impact--even for areas that could use ANY boost in jobs--would be great. And, while the forest industry in the Lake States punches at a decent weight ($32.9B in size), it tends to carry a very quiet stick on the federal level. In other words, states like California tend to lead the agenda in areas like this; Michigan & Wisconsin, not so much. 

 

Barring a big shift in investor perception and behavior, without more revenue streams (more, not less mills; more environmental market activity like mitigation banks or carbon credit sales), it's hard to see how the Lake States timber markets will attract more capital. For now, we will just have to be content with the returns that biology, sound management, and opportunistic purchases provide.

 

May Mr. Dangerfield RIP--the Lake States don't get no respect, either.

 

JDB

Further Reading:

 

http://www.prentissandcarlisle.com/assets/PCnwslttr_2QTR-14.pdf

 

http://bluesource.com/news/view/Blue-Source-and-The-Forestland-Group-Register-Largest-Carbon-Project-with-California-s-Cap-and-Trade-Program

 

A look at Lyme Timber III--and how Lyme generates returns for investors--

 

http://www.thegiin.org/cgi-bin/iowa/resources/profile/18.html

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No easy answers

No easy answers | Risk-Adjusted Returns | Scoop.it
NOBODY knows anything. William Goldman said that about the movie business but the same could be said for investment. History is replete with brilliant people who... ("The purpose of investing is not to simply optimise returns and make yourself rich.
Jack D Bridges's insight:

A great, short read that looks at William Bernstein's new book, "Rational Expectations: Asset Allocation for Investing Adults"

 

http://www.amazon.com/Rational-Expectations-Allocation-Investing-Adults-ebook/dp/B00KSPCY24

 

I haven't read the book yet, but The Economist summary explores Bernstein's points about why investing is so hard. Indeed, there are no easy answers. All professionals can do is to keep learning, so that we can increase our odds of success when we deploy capital in the future.

 

It also helps to adjust expectations down--a lot. 

 

As Bernstein says: 

 

“The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.”

 

Well said, Mr. Bernstein. 

 

JDB

 

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Catchmark Timber...Zzzzzz. How about a public / private timber vehicle discussion?

Catchmark Timber...Zzzzzz. How about a public / private timber vehicle discussion? | Risk-Adjusted Returns | Scoop.it

Jerry Barag, president and CEO of Catchmark Timber Trust (NYSE: CTT), joined REIT.com for a CEO Spotlight video interview during REITWeek 2014: NAREIT’s Investor Forum, held in New York.

 

Barag was asked about his company’s performance in the first quarter of 2014. Barag noted that following the firm’sinitial public offering (IPO), it implemented a new management team and strategy.

 

“That’s going along very well,” he said. “We’ve increased production volume significantly over the last year and have brought on enough contractor and manufacturing capacity to handle that. At the current rate, we’re running slightly ahead of schedule for the year. We have also encountered a very strong pricing environment at the same time. As a result, we have been able to increase guidance once this year as well as announce a dividend increase. We expect that those conditions will persist for the balance of the year. We have some operating capacity to finalize before the end of the year and one large land sale, which has already been committed for December.”

 

Barag also discussed pricing and competition for acquisitions.

 

“We’ve been very pleased since the beginning of this year,” he said. “There has been an ample supply of property that has come on to the market or that has been available to transact. We have been working our way through that and have been successful on garnering and closing several transactions. Quite frankly, our pipeline continues to expand. It looks like, after a six-year hiatus in the timberland markets, 2014 is shaping up to be a more normalized year in terms of transaction volume. We expect to participate fully in that.”


Via Sam Radcliffe
Jack D Bridges's insight:

CEOs of publicly traded companies are an optimistic bunch. This is hardly news--and Mr. Barag of Catchmark Timber Trust (CTT) is no exception.

 

Instead of looking at this tiny REIT ($350M market cap; roughly $400M enterprise value, and $150M in negative retained earnings on its sheet), there is a more interesting issue to explore for a timberland owner: Public versus private ownership.

 

For such a small company, why is it public? Considering the vast amount of private capital / TIMOs in the asset class, this is a relevant question. For CTT, past is prologue. It began in private, in 2007, as Wells Timber REIT, with 250,000+ acres in Georgia & Alabama. Leaving aside the perils of non-traded, private REITs,

 

http://www.investmentnews.com/article/20121217/FREE/121219947

 

http://www.girardgibbs.com/blog/wells-timberland-reit-suffers-finra-fines-devaluation-and-investor-scrutiny/

 

One thing is clear: They bought the top of the market--and did it with leverage. 

 

Fast-forward a few years into the domestic housing rebound, a few more rounds of extraordinary Fed intervention, and those sitting on tax-deferred assets start looking for liquidity. 

 

So, liquidity is one big reason for public ownership. For companies that can bear the cost of listing / SEC compliance, this structure creates a broader, more flexible shareholder base; it gives smaller (often less sophisticated) investors access to ownership, with no minimums or 10-year+ lock-ups. 

 

In other words, being public (and listed on an exchange) automatically creates a larger marketplace for minority stakes in a company's assets. And, as long as certain hurdles are cleared, once a company is public, bigger investors (funds) have to own the stock. This is especially true for REITs, and also several specialized mutual funds with a sole mandate to buy publicly traded timber concerns. Easy enough.

 

But, what are the liabilities of this liquidity? One, it subjects a company's valuation to a marketplace & operators who don't understand timberland investing. Two, consider the marketplace itself--and harnessing a unique, long-term investment to the vagaries of an unstable, hyper-short term market. Finally, companies cannot control who owns the equity. So, this means anyone from Carl Icahn to Jim Chanos can sniff around, and management is powerless to do much about it. 

 

For smaller companies, where investors over-value and over-pay for minority equity stakes with less frequency, the assets of public ownership are questionable.

 

For bigger concerns, the benefits of being public are obvious: Scale, access to capital; a deeper, more efficient liquid market, a ready acquisition currency (equity or convertible debt); tax efficiency as an MLP or REIT without the regulatory scrutiny that Wells Timber REIT encountered.

 

This brief look at the issues of public ownership barely scratches the surface. And, I can't say why Wells Timber REIT, now Catchmark Timber Trust, chose to re-brand and list as the mighty-mite of the timber REITs (instead of becoming an MLP, or selling to private stakeholders).

 

From a timberland investor's perspective--and we are a sober minded lot--here is one point of view: Public ownership brought the lure of liquidity for trapped investors--and the chance to find larger pools of less sophisticated capital to sell to. 

 

In the coming days, I'll try to explore the issues surrounding various forms of private ownership of timberland....though, that ground is probably better covered by experts like Sam Radcliffe at Prentiss & Carlisle.

 

Post-script:

 

*Insiders own less than 6% of CTT equity (not sure how the various classes of stock impact this figure). And, mutual fund T.Rowe Price is CTT's largest shareholder.

 

Catchmark's second biggest holder is a Swiss timber fund, Pictet (where I've spoken with the PMs--very sharp guys). But, Pictet Timber is a $600M fund, and they hold $13M worth of CTT. So, it's a small position for them, within an equally small universe of investible companies. 

 

**I own no shares of CTT, and have never bought any for anyone else. Unless a market crash presents an exceptional entry point in CTT, there are far more compelling places to invest and take risk. 

 

Some supplemental reading:

 

http://www.pictetfunds.com/nns_fi/browse.fund?fundId=LU0340557775&navId=NAV_ID_DETAIL_OVERVIEW

 

http://www.catchmark.com/files/9314/0085/4826/2013_CatchMark_Annual_Report.pdf

 

http://www.catchmark.com/files/1213/8384/7334/Timberland_INV_2012_Annual_Report.pdf

 

 

 

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Jeff Gundlach Presentation - Ira Sohn Conference 2014

Jeff Gundlach Presentation - Ira Sohn Conference 2014 | Risk-Adjusted Returns | Scoop.it
Jeff Gundlach is the Chief Executive Officer and Chief Investment Officer of DoubleLine. He was formerly associated with TCW
Jack D Bridges's insight:

Attention Mr. Rick Holley, CEO of Plum Creek Timber: you might want to get a copy of Jeff Gundlach's powerpoint from the IRA Sohn Investment Conference. Or, you could just skip to this graph:

 

"We will never see a year of 1.5 million housing starts”, or anything close to what we say (sic) before the financial crisis.

 

“This is a generational preference”, Gundlach believes in terms of young people preferring to rent over owning homes.

 

Gundlach believes that there will be no rebound in housing and that we will go to new lows. Gundlach says to short SPDR S&P Homebuilders (ETF) (NYSEARCA:XHB), which is an ETF which tracks the home builders sector.

 

OK, I'm nowhere near as bearish as Mr. Gundlach (new lows seems as aggressively dumb as 1.5M housing starts). But, it pays to listen to smart people who manage huge sums of OPM. Gundlach may have an ego to match his impressive CV, but big head aside, investors would do well to heed his warnings here. 

 

Here is a link with a transcript of JG's comments--and for the truly brave, a CNBC interview (Warning-- 98% of CNBC content is NSFIP: Not Safe for Intelligent People).

 

http://www.valuewalk.com/2014/05/jeff-gundlachs-housing-gdp-outlook/

 

And, a Bloomberg piece covering the same subject:

 

http://www.bloomberg.com/news/2014-05-05/gundlach-recommends-betting-against-housing-exchange-traded-fund.html

 

JDB

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Plum Creek Timber's CEO Discusses Q1 2014 Results - Earnings Call Transcript

Plum Creek Timber's CEO Discusses Q1 2014 Results - Earnings Call Transcript | Risk-Adjusted Returns | Scoop.it
Plum Creek Timber Company, Inc. (PCL) Q1 2014 Earnings Conference Call April 28, 2014 17:00 ET Executives John Hobbs - Vice President, Investor Relations Rick Holley - Chief Executive Officer David Lambert - Senior Vice Presi
Jack D Bridges's insight:

A few brief takeaways from Plum's recent quarter:

 

1) The current mid 900K single family housing start pace for 2014 doesn't phase Mr. Rick Holley. No. He's holding to the 1.1M forecast:

 

"Despite the headwinds of the slowing recovery in housing market, 2014 is shaping up to be a good year for Plum Creek. We expect that the winter weather’s impact on the first quarter will be temporary and will continue to believe that housing will approach the 1.1 million mark this year. The fundamentals of our North American supply-demand thesis are on track." 

 

So, Plum still believes the US is on the path to 1.5M housing starts in several years. None of the analysts asked Mr. Holley if he believes in unicorns, but let me say this: Between betting on 1.5M housing starts or betting on the existence of unicorns...I'd say the unicorns might have it.

 

Why? Account for the huge spike in starts during the credit bubble, then consider what the Fed is doing to manipulate rates and asset prices....no matter what demographics tell you (never mind the equally important household formation), it's folly to forecast such optimism in the face of a very distorted business cycle. 

 

2) Unlike some businesses looking for a convenient excuse for a weak quarter, the historic winter weather actually does impact timber businesses--a lot. Some of this can be made up in Q3 or Q4, but the harsh weather did slow harvests and deliveries to mills across the country. 

 

3) Plum will buy back stock at $40 / share. So, that's a good indication from Mr. Holley where management thinks it's prudent to opportunistically sell assets that are fully priced (PNW acreage, for example), and use the proceeds to put a floor in the equity price.

 

"so you get down around $40 a share, you will see us buy the stock back. We think it’s very compelling to do. I mean clearly at $43 a share, we won’t buy it back, so we just issued at $45, but it clearly makes sense."

 

4) Finally, the part I always jump to in any PCL call: A glance the timberland investment marketplace. UBS analyst Gail Glazerman had this exchange with Rick Holley.

 

Gail Glazerman - UBS

Okay. And just kind of looking at the industrial timberland market, can you just give any sense of what you are seeing I guess there are a couple of large transactions in the South during the quarter are those types of things that you would – that you are looking at and do you feel having just done the acquisition, you would be in the position to pull the trigger and just in general the level of activity and interest that’s out there?

 

Rick Holley - Chief Executive Officer

Yes, again, we look at everything that comes to market and to the right opportunity that we believe it’s accretive to value and cash flow for this company, we have the capability and we would pull the trigger. As you have seen lately as a lot of these 40,000 and 50,000 acre type of transactions in the marketplace, Deltic announced one recently and there was another one by a new company, I forgot the name (It's Catchmark Timber Trust: CTT, Mr. Holley....), but anyway a small a new REIT in the South. So there has been a couple of smaller transactions, but – and we looked at both of those transactions, so we are very familiar with them.

 

Me, again.

So, within the 30M acres that TIMOs now own in the US, expect the 40 to 50K acre deals to be where buyers are looming, with any major deals going forward to remain between TIMOs. Duly noted.

 

Conclusion: I don't expect fireworks on either side of the market for PCL with this report--just as PCL isn't historically nose-bleed expensive, it isn't screaming cheap, either. This writer figures Plum is fairly priced where it trades--and there are far more interesting places to invest in the asset class. 

 

JDB

 

 

 

 

 

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Sam Radcliffe's curator insight, April 29, 9:38 AM

Be sure to check Jack Bridges' comments here: http://www.scoop.it/t/risk-adjusted-returns

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Carl Icahn looking to launch an army of mini-Icahn investors - The Term Sheet: Fortune's deals blogTerm Sheet

Carl Icahn looking to launch an army of mini-Icahn investors - The Term Sheet: Fortune's deals blogTerm Sheet | Risk-Adjusted Returns | Scoop.it
Legendary Wall Streeter says he could spend as much as $1 billion seeding new activist investors.
Jack D Bridges's insight:

A good, short follow-up to my recent post on 'activist' investing. And, try not to shudder at the phrase, "army of mini-Icahns." That's just what the investing world needs (start rolling eyes...now).

 

Also, note the extremely descriptive and helpful words Mr. Icahn used when asked about how he's going to pick these "mini-Icahns:"

 

"They would have to be "interested and involved in companies," says the $22B man.

 

You mean they're not going to be random doormen plucked from your neighbor's buildings on Park Avenue? Shocking. 

 

Finally,  read the funny remarks from fellow 'activist' Jeff Ubben:

 

"There's been a lot of coverage of Carl, but not a whole lot of change," says Ubben. "Activists are getting too much credit and not being accountable for their short-term behavior."

 

Bingo. 

 

JDB

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Activists here to stay as war chests near $100 billion Market Extra

Activists here to stay as war chests near $100 billion Market Extra | Risk-Adjusted Returns | Scoop.it
Whether they’re castigated as corporate raiders or lauded as activist investors, Carl Icahn, Bill Ackman, Dan Loeb and other trouble-making billionaires aren’t going away anytime soon. Whether they’re a friend or foe to shareholders is another matter.
Jack D Bridges's insight:

Good read on the ecosystem of activist investing.

 

The value segment within this universe typically produces some very good research. One shop I follow, Starboard Value, goes beyond the usual activist MO (attacking management, going on CNBC, proxy-fighting for Board seats, pushing up stock, saying bye-bye). 

 

Over a period of years, Starboard nudged one company to speed-up some important changes--persuaded it not to take on more debt, and probably attracted a lot of institutional interest in the company's stock. In other words, they waged a very thoughtful, very patient, very successful campaign.

 

Starboard didn't just mindlessly push for a huge debt-fueled stock buy-back; they didn't go on CNBC or twitter to talk their book. What Starboard did do is a ton of research on this particular company, and  then methodically executed an excellent strategy. In short, very good activists blur the line between how hedge funds, and private equity behave. As you'll see, not all activists operate with such precision--or patience.

 

180 degrees away from Starboard is The Icahn Way. Perhaps my view of Uncle Carl is unfair, and looks too much at his unethical behavior in the 80s (read "Predator's Ball," by Connie Bruck), not to mention his very recent exploits, which include Dell, Ebay and Apple.

 

Looking at his latest quests--haranguing Michael Dell, pushing Ebay to spin out Pay-Pal, and brow-beating Tim Cook to buy-back more stock--the results aren't impressive. Meh, at best. What Icahn does is far more public relations work, than investing. Chasing camera crews around Manhattan trying to squeeze a few extra BPS out of large cap stocks? No, thanks.

 

Icahn has his defenders--perhaps the guys who got rich riding his coattails during the Drexel Burnham cartel days; you won't find one here. Instead of following personality cults, I look for research that belies a thorough bottom-up approach. Once that baseline is established, the best "activists" establish clear goals for their campaign, then carefully ply their craft. 

 

The shops with this kind of methodical approach won't have any trouble raising funds when the current bull croaks. No. If mammoth pools of capital like CALPERS are allocating to this space, activist coffers should be full for the foreseeable future. 

JDB

 

 

 

 

 

 

 

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Seeing the trees, Missing the forest

Seeing the trees, Missing the forest | Risk-Adjusted Returns | Scoop.it
Jack D Bridges's insight:

If I've learned anything in the last 12 months it's this: Professional investors just don't understand timberland investment. 

 

I could easily spill 5,000 words on the subject, but let's just focus on three brief reasons why. 

 

1) Many wealth managers still prefer liquid, faux-timber investments: The timber REITs (WY, PCL, RYN, PCH, CTT). These vehicles are publicly traded equities--and are highly correlated to the S&P 500. Actual, physical timber assets exhibit a negative correlation to common stocks--which offers real peace of mind when the financial system seizes up in panic about every 7-8 years.

 

It also pays to remember the REIT structure encourages leverage, in order to take a somewhat lumpy business with varied harvests, and pay-out a steady distribution to shareholders. With our current monetary policy (and Wall St. feasting on the Fed's carry), this might not seem like a big deal; let's see how this balance works in a time of "normalized" rates. To sum up, leverage, equity correlation, and a reliance on Wall St. with its hyper short-term thinking, in a long-cycle industry. The price of liquidity is steep indeed: You've been warned.

 

2) Timberland is an incredibly hard asset class to generalize about. There are huge differences between continents, regions, wood-baskets, specie growth rates, specie mix, HBU values, etc. So, when someone says to me, "the asset class is over-valued," it trips my antennae. Really? You think so, do you? What regions seem over-priced, and why? Because, to say the domestic timber REITs are over-valued is actually quite a different statement altogether...

 

3) The trick is finding inefficiently priced assets--or managers with access to them. And, guess what? Much of the domestic timberland marketplace is probably too efficient, making alpha far harder to come by. So, one needs to look to other markets (or at least niche managers) within the asset class to find growing wood baskets at attractive prices. And, sorry Charlie, these opportunities are not available in liquid, ETF form. 

 

To be fair, not all TIMOs and PE funds are, by default, preferable to listed timberland businesses. But, for sophisticated, accredited investors with choices--the opportunities in the current marketplace aren't found on an exchange. 

 

JDB

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Sam Radcliffe's curator insight, March 14, 9:39 AM

The above opinion is from Jack D. Bridges who has a great column at http://www.scoop.it/t/risk-adjusted-returns. Check it out.

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Lessons from Seth Klarman: How to find value, when (almost) everything is expensive...

Jack D Bridges's insight:

1991 saw the end of the USSR, the first Bush war against Saddam ("this aggression will not stand, man") and most importantly, the publication of Seth Klarman's classic, "Margin of Safety." 

 

This Barron's interview from 1991 covers familiar ground for value investors, and those of us who know the book---but it's a worthwhile read, nonetheless.

 

Even if many of the structural market inefficiencies no longer exist as they did in 1991 (how many more funds buy spin-offs now; how many hedge funds compete for a finite number of distressed securities, etc.), what's important in the interview is this: Klarman's process.

 

Why? The Baupost discipline ignores a whole host of risk-chasing, herd-like behavior among professional investors. Klarman will keep cash levels extremely high (30%+)--or even return cash to investors if he cannot find securities that meet his criteria; Baupost largely ignores the broader market, and hunts for special situations (see pages 7-8 for a few general areas); Baupost builds and holds positions for very long periods of time. 

 

http://screencast.com/t/XfKICgVIn1Cf

 

If the above chart of the S&P 500 since 1990 scares you (let's hope 2014 is just a consolidation year, folks), consider raising some cash and learning more about how Seth Klarman manages money. It will make you a better investor. Trust me. 

 

As for finding value right now, I would concentrate on specific businesses that institutional investors have thrown out the window recently--maybe it's coal companies, or miners, or certain S. American integrated oil concerns (not PBR...), but the list of "ugly" looking equity charts is finally starting to grow. And, that's exactly what value investors like to see.

JDB

 

 

Many thanks to "The Odd Lot" for finding this gem:

oddlotinvest.file.wordpress.com

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Corn Plummeting Spurs Talk of ’80s U.S. Farmland Bust: Mortgages

Corn Plummeting Spurs Talk of ’80s U.S. Farmland Bust: Mortgages | Risk-Adjusted Returns | Scoop.it
Din Tai Fung, a restaurant in Shanghai’s Xintiandi district, is famous for its steamed pork dumplings. The pigs that keep those dumplings on the table are fattened with corn -- much of it imported from the U.S.
Jack D Bridges's insight:

I've written a few posts in the past year about US farmland prices on a perilous path: One that sees prices detach from reality. Well, the above is a great read, and explores the danger of chasing an asset class, no matter how good the secular trends look (population growth, rising demand, global decrease in arable land, etc.). 

 

Anyway, it pays to remember the most important part of investing: Price paid, for anything, is often the single biggest driver in one's return. 

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Timber REIT update: Two secondaries, and a cellulose sell-off

Timber REIT update: Two secondaries, and a cellulose sell-off | Risk-Adjusted Returns | Scoop.it
Jack D Bridges's insight:

It's been a busy fall for the Timber REITs: Weyerhaeuser completed the sale of Wreco, through the seldom used, wrestling move-sounding, Reverse Morris Trust. Plum Creek bought 500K acres of prime southern hardwoods from MeadWestVaco--issuing 14M shares to pay for part of the tab. And, Rayonier scared 20% off its market cap by talking of compressed margins for its cellulose fiber business in 2014. Whew!

 

Given all this activity, let's look a little more in depth at what these moves mean for investors. 

 

1) WY Becomes more "Pure"

Purchasing Longview Timber, and divesting their homebuilding division, makes Weyerhaeuser more of a 'pure' timber play--creates synergies and even more scale for their Pac. northwest operations. 

 

http://www.bloomberg.com/news/2013-06-16/weyerhaeuser-to-buy-longview-timber-for-2-65-billion.html

 

Despite the high price WY paid for Longview (for $4109/ acre, the lands should be stocked with loads of veneer sawtimber), the move seems prudent. The market absorbed the equity dilution well, WY raises its distribution (currently about 3%), and the company increases its exposure to a crucial export market (Doug Fir logs typically command a premium for export). 

 

Within the timber REIT universe, Weyerhaeuser seems to be in the best shape going forward--in terms of balance sheet, core geography, and being less reliant on a continued domestic rebound in housing. 

 

2) Plum Reaches for Southern Comfort

I've written about Plum's concentration on the south before, but the recent acquisition of 500K acres is the centerpiece of this intense focus on the region. PCL took on more debt, and did a secondary at $45 to pay for the deal--and today, Plum equity has fallen below the offering price. Part of this is PCL going ex-dividend and the worry about Fed tapering of QE, but it bears watching how investors view the deal going forward.

 

If one thinks the broader equity market is priced to near perfection (as this writer certainly does), the problem with timber REITs correlation to the S&P will rear its head. Why? This is the rub of owning companies who have an asset base whose value can often be negatively correlated to markets, but whose stock price  and valuation day-to-day is close to a correlation of one.

 

So, by owning timberland through the timber REITs investors are losing one of its cardinal virtues, and arguably, gaining a bigger liability: Exposure to the casino. Not to sound too cheery, it's just something to bear in mind if and when equities head into the next bear market...REITs might out-perform, but they'll still lose value.

 

Pardon the digression, but Plum is often a highly shorted equity, and tends to act more like the S&P than the other REITs. Still, long-term, the acquisition should work out well no matter what one thinks of southern saw-log prices, household formation, or housing starts. The deal and the secondary look like smart strategic moves for Plum. And, the PCL offering under $45 (for those without access to Priv. equity timber funds) is worth dipping into. 

 

3) The same thing that makes you Laugh...can make you Cry

Rayonier has seen better days: 

http://stockcharts.com/freecharts/gallery.html?s=ryn

 

Just today China came out with a tariff ruling that could impact some viscose exports from Rayonier (the company says it's non-material, and disregards their high-value products). As I mentioned in an earlier post, the business that gave Rayonier such appeal as a diversifier away from housing, has turned into a headwind as margins contract--and investors flee.

 

So, the selling in Rayonier could eventually present a buying opportunity--but most professionals will wait a quarter or two before jumping into a story like Rayonier. 

 

4) Pot-wha?

Even though Potlach owns 1.4M acres, it's kind of the forgotten timber REIT. Why? Geography, for one:

http://www.potlatchcorp.com/Landholdings.aspx

 

Potlach's ownership is rooted in wood-baskets without much export potential or infrastructure (This isn't to say that there isn't great HBU value in their portfolio--it's just the market tends to focus much more on the giants above). One final word about PCH--management is cautious and deliberate, and focused on growing the dividend (something to bear in mind for those lookng for dividend growth, without a likely dilutive 'deal').

 

For more detail on Potlach, this is a good read:

http://seekingalpha.com/article/1761192-potlatchs-ceo-discusses-q3-2013-results-earnings-call-transcript?source=yahoo

 

That's it for this very brief tour of the fall season for the four timber REITs. Given how these cycles work, there shouldn't be any more large deals for them for the next few years. Any M&A flow going forward will likely come from the TIMOs--and their 30M acres they control in the US. 

JDB

 

 

 

 

 

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The hare gets rich while you don’t. Back the passive tortoise | FT Alphaville

The hare gets rich while you don’t. Back the passive tortoise | FT Alphaville | Risk-Adjusted Returns | Scoop.it
Nomura, as part of an excellent report looking at various aspects of active versus passive investment management, have considered Warren Buffett's famous bet that an index fund will beat a fund of hedge funds over ten years.

Buffett is winning, and the bank's conclusion is that this is very far from a fluke:
In our view, alternative assets as a group show consistently poor performance. Beta is high. Alpha is near zero, if not negative. Correlation with standard asset classes is high. Return and diversification benefits are negligible.
More on that below, but first note the proportion of pension fund fees going to the alternative investment fund managers. Never have so few been paid so much by so many for doing so little.
Jack D Bridges's insight:

I'd like to read the original Nomura report that looks askance at alternative assets. This summary from the FT doesn't include any comments about the timberland asset class--so maybe Nomura focused more on Mr. Buffett's wager, and hedge fund FOFs in particular.

 

To me, the takeaway from the article is this: You don't have to back the hare, or the tortoise to grow wealth over time. Most investors should avoid the race altogether, and allocate a portion of their investible assets to trees, instead. Biological growth is a far safer bet for long-term investors than Aesop's fabled racers.

 

JDB

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A Man Without A Market

A Man Without A Market | Risk-Adjusted Returns | Scoop.it
Jack D Bridges's insight:

Here is the dilemma: How does one invest, when nearly every “opportunity” is less appealing than the next?

 

If you’re Seth Klarman, with his superb team of generalists, it’s simple. You look to esoteric securities, or inefficiently priced assets in other markets—Greek bonds, Canadian limestone pits, Portuguese real-estate. And, when you run a $20B fund filled with brilliant people (and your name is Seth Klarman), you can do this. 

 

Others aren’t so lucky. Even if self-directed investors wanted to invest in this manner, it’s impossible. These securities & assets demand loads of research, are never offered on a small scale--and would require serious professional help / consultants to manage & unwind over time). 

 

Several years ago, S. Klarman wrote a letter to his LPs bemoaning this Fed-inspired climate of “pick the least bad place to deploy capital.” I noted how this was an unusual bit of whining from a legendary investor—seemingly capable of finding excellent risk-adjusted returns in nearly any macro climate (or Fed policy regime). 

 

As bad as Klarman was feeling then—it is only getting worse for small investors. And, when nearly every publicly available asset class presents extreme risk of over-payment. What now? What to do? 

 

For most, this is the only thing that can be done: Raise cash, keep looking for ‘special situations,’ and sit tight. Investing at the end of bull-markets is never much fun. One cannot change the markets we’re able to invest in; only the amount of risk we choose to take, and the times capital is deployed. 

 

JDB

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Cash Crops With Dividends: Financiers Transforming Strawberries Into Securities

Cash Crops With Dividends: Financiers Transforming Strawberries Into Securities | Risk-Adjusted Returns | Scoop.it
With its steady income stream, farmland is proving to be a ripe offering for sophisticated investors.
Jack D Bridges's insight:

There is another headline for this story: "Bye-bye inefficient market; hello lower returns."

 

This is not to say that farmland isn't still a reasonable, safe investment in some areas / regions. It just depends on the local market dynamics and underlying assumptions made for the investment. 

 

I've already written about the scramble among institutional investor within farmland--but, if any manager pitches a fund in the space as "can't lose," I suggest watching this excellent documentary:

 

http://www.pbs.org/wgbh/americanexperience/films/dustbowl/player/

 

There are many symptoms of Quantitative Easing (yield chasing, nutty CRE cap-rate math, never-ending equity market rallies), but just to re-iterate a simple point--over-paying for an asset is the surest way to generate negative returns. No matter how attractive or "safe," the asset class may be. 

 

Hat tip to my friend, John Nash, for pointing me to this excellent piece from GMO on ag-investing:

 

http://tinyurl.com/qjpnbek

 

JDB

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Meet Alternative Investing's Slick New King, Billionaire Nick Schorsch

Meet Alternative Investing's Slick New King, Billionaire Nick Schorsch | Risk-Adjusted Returns | Scoop.it
Alt-investing has arrived on Main Street, and there's no better salesman than newly minted REIT billionaire Nick Schorsch.
Jack D Bridges's insight:

This is a good, if brief, look at the nontraded REIT empire of Mr. Nicholas Schorsch.

 

Clearly, he's created a very clever model that draws from several powerful currents within finance: artificially low rates, leverage (and a tax code that encourages it), and yield seeking (chasing) investors. 

 

Who is this model aimed at? Mr. Schorsch and his legions of financial advisors don't hide their target: The mass affluent--or, investors with investible assets of 200k to $1M.

 

Leaving aside the usual red flags raised by nontraded REITs (opaque structure, highly questionable fees, illiquidity, etc.) is the management of Mr. Schorsch's vehicles (mainly, Mr. Schorsch), worth paying for compared to similar investments? And, would I ever allocate capital to it? 

 

I don't have an audited track record for Nicholas Schorsch and all of his various funds. And, given the whole host of issues I have with his real-estate offerings, I would need to do a ton of diligence before even considering allocating capital to anything he runs. Why? There are better ways to invest in real-estate, and far better 'alternatives' with more transparency about how & where they return 7% per annum for investors. 

 

This is not to say Schorsch and his funds haven't been successful, or made investors money. It looks like this Fed-backed risk chase has been very good to American Realty Capital and its shareholders. But, when the music stops, how do highly levered, capital market dependent, aggressive risk-takers fare? Rather than find out, I would do this:

 

Wait for asset prices to fall, and just buy shares of a few public REITs within different market segments (say, Douglas Emmett: ticker, DEI, among others), and let the passive portfolio do its work.

 

I bet the results would outstrip most nontraded REITs, especially when one nets out fees, adds the convenience of liquidity, and the ability to continually add to the portfolio at lower valuations. 

 

JDB

 

PS. Calling nontraded REITs 'alternative investments' doesn't seem right. Most allocators think of true alternatives as hedge funds, PE, commodities, and things like direct timberland or farmland ownership. So, the Forbes appellation calling N. Schorsch the "New Alternative King," is bollocks. REITs are hardly alternative, and I'm pretty sure he's no monarch. 

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'Equities in Dallas,' says S&P 500 to 1970 This Year...really.

'Equities in Dallas,' says S&P 500 to 1970 This Year...really. | Risk-Adjusted Returns | Scoop.it
Market veteran Laszlo Birinyi is confident the stock market, which hit new highs on Tuesday, is poised to keep rallying in the months ahead.
Jack D Bridges's insight:

For those who haven't read "Liar's Poker" in a while, Mr. Laszlo Birinyi (yes, that hunk of a man pictured above), was the Salomon Brothers MD in Michael Lewis's book who tried to recruit a training class to the equity side of the business. He failed. Where he did succeed is coining a term to connote the lowest, least desired job in all of Salomon Brothers:  working in equities, in lovely Dallas, TX.

 

http://ltsy.qhltw.com/book/liarspoker/001.htm

 

So with this funny backdrop, consider the absurdity of predicting a further 3% S&P rally at this point. Maybe to momentum chasers, and guys who measure their holding periods in minutes, getting the S&P to 1970 by September means something. 

 

I will agree with Mr. Birinyi about one thing--posts like this one do speak to a huge amount of skepticism with the indexes at record highs. And, he might be right about it being the last phase of the bull market, too. But, is this a time to add beta chasing risk? No. Just look at the chart in the story, and ask yourself what happened to capital that bought the market in 2000, or 2007-8? 

 

Finally, this writer's disillusionment with common stocks has only grown with each new round of Fed asset purchases. And, while markets may not cliff-dive at the end of QE, it should be easy to tell the Birinyis from those holding plenty of cash when this euphoria burns out.

 

No, ignore the industrial "don't ever sell" complex on Wall St. Instead, listen to investors like Seth Klarman of Baupost who will tell you this: Find value where you can, and always have plenty of cash ready to invest. Doesn't that make more sense than some saying, "Better catch that next 3% of upside, before it drops 10%" I should hope so....

 

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Timber Inventory Uncertainty: Impact on Property Valuation


Via Sam Radcliffe
Jack D Bridges's insight:

Even in long-cycle businesses, it pays to mind the details. While I make a habit out of reading P&C quarterly newsletters, for those who don't need to know the subtle variances of hardwood versus softwood pulp pricing in the NorthEast region, skip to page 7, please.

 

There you'll find Sam Radcliffe's excellent discussion of uncertainty in timberland valuation methods & outcomes. Everyone has their own models, which attempt to account for a fair amount of unknown elements compounded over time. The point from S. Radcliffe's work that resonates with me is simple: One needs a conservative range of values--not merely one single number, when trying to determine an asset's appraised value. 

 

http://www.businessweek.com/articles/2012-07-05/zack-parisas-forest-inventory-software

 

Now, if a system like Zack Parisa's allows us to more efficiently and precisely measure how timberlands are stocked,  it would eliminate some (not all) of the uncertainty from a difficult, time consuming task. 

 

Until then, especially for small owners of timberland, it pays to heed S. Radcliffe's words. And, then go back and run the numbers again--and then again. 

 

JDB

 

Post-Script

Let's say you are interested in owning timberland directly, say in the northeast or upper-midwest: You want to invest between $500K and $1M to buy land, then develop & grow hardwood saplings from acorn to saw timber, as a long-term investment for your own seed. Where would you start? If it were me, I'd read a few more Prentiss & Carlisle quarterly letters....and then pick up the phone to call Sam Radcliffe. 

 

http://www.prentissandcarlisle.com/

 

*The author has no business relationship with P&C--just a great deal of respect for the work of the firm and its principals. 

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Sam Radcliffe's curator insight, April 30, 12:18 PM

The timber inventory piece appears toward the end of our quarterly newsletter, but check out the rest of it as well!

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As Wealthy Families Turn to Hard Assets, Portfolio Managers Get Creative

As Wealthy Families Turn to Hard Assets, Portfolio Managers Get Creative | Risk-Adjusted Returns | Scoop.it

Vineyards, gold mines, ranches — the very wealthiest families have always owned hard assets. In recent years institutional investors have followed their example by allocating to everything from timberland to fine art for diversification. Today many wealth managers are making real assets that were once off-limits to all but the richest available to high-net-worth and mass-affluent clients, and the asset management industry is catering to this growing demand.

 

“Often these are truly multigenerational assets that will be held in perpetuity,” says Michael Freeburg, founder and managing member of Greenwich Wealth Management, a Greenwich, Connecticut–based registered investment adviser with more than $1.5 billion in assets. “That long-term, buy-and-hold investment time horizon is very attractive for families preparing for future generations.”
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Recently, Sprott [Asset Management], which manages more than $7 billion through business lines that also include hedge funds, private equity and debt, and wealth management, has broadened its real asset offerings. Last month the firm acquired three liquid alternative mutual funds focused on infrastructure, timber and agriculture, respectively, from Toronto-based Arrow Capital Management.
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For the managers leading the charge into hard assets, everything comes back to yield at a time when central banks have driven interest rates to all-time lows. “The majority of our investments are generating cash flow on day one, and the ability to capture income from a creditworthy counterparty is highly prized by investors,” Wood Creek’s Hellerman says. “Interest in the space will only increase with time.”


Via Sam Radcliffe
Jack D Bridges's insight:

Thanks to S. Radcliffe for another good find. 

Once the liquidity / risk chase tapers off (or worse), hard asset based investments should benefit from a rotation to safer, firmer ground. Of course, I've been saying this for the last year+ of the bull market in equities....but what is a 10% equity rally when one is looking out 10-15 years? Not much, indeed.

 

www.sustainableresourcefund.com

 

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RHI Entertainment: Looking back at A Deep Value Trainwreck

RHI Entertainment: Looking back at A Deep Value Trainwreck | Risk-Adjusted Returns | Scoop.it
Jack D Bridges's insight:

The investment thesis on RHI Entertainment seemed rational at the time: Broken IPO, deep value opportunity to buy a film/TV library whose range of values, along with the current production pipeline, was thought to exceed a hefty debt burden. Sounds harmless enough.

 

When one adds an egregiously overpaid management team, a time of increasing disruption for media industry business models, and oh, that $500M debt pile, the thesis for owning RHI equity deserves an Academy Award for Best Costume Design. 

 

The RHI implosion offers not one lesson in investing gone wrong: There are enough to fill an entire book. By examining the assumptions that I (and many others) made, and the steps I took in managing the position, we can hopefully learn how to avoid situations like RHI in the future.  

 

1) For starters, Why did I buy RHIE? I started watching RHIE in early 2009, after Seth Klarman initiated a position for Baupost. Despite my aversion to media production companies (buying a film "slate" with 3 lousy "Gigli"-esque titles, and one yet to be named Scarlet Johanssen project directed by her personal assistant...uh, no thank-you), like many value investors, I hold to the old Ben Graham saw, "Everything is AAA at the right price." On its face, RHI looked a reasonable risk / reward for the distressed valuation it was trading at when I first bought shares--$2.00/ share, if memory serves. 

 

2) Now, the entire blighted time I owned RHI, it was, thankfully, a very small position. A lot of pros will limit equity stakes to no more than 4% of their book; RHI wasn't even close to 1%. So, while I trusted Seth Klarman's deep value appraisal of the company, I felt the risks to the business in 2009, and the risk of the management team, were serious. It's also worth mentioning that Baupost may have been the biggest holder of RHI equity at one time, but what is a $15M position at a firm with assets then north of $18 Billion? A rounding error...but let's look at why management, led by Robert Halmi, Sr. himself, raised big red flags.

 

3) At a time when the US was grappling with the worst financial crisis in 80 years, a compensation package such as this (taken from the S-1 filing in 2007) stands out: 

 

http://screencast.com/t/qJ5cOWWSoMH

 

And, that's just Robert Halmi, Sr. Another executive made $1.25M base per year; two others pulled in $750K in base comp, as well. So, after going public at $14 per share just months earlier, and watching their company's value cliff-dive (along with the US economy), did management re-align their pay to reflect the performance of their newly public equity? Nope.

 

4) Given this shaky backdrop, from busted IPO, to questionable management practices, what caused the RHI deathblow? And, did I stick around for the screen credits? To answer the second question first, thankfully, I did not. 

 

Looking at the old RHIE chart, you'll notice the 50% haircut the equity took in 2009 after reporting 3rd quarter results. This was the quarter where Mr. Market finally realized several things--chief among them, the "value" of the library was depreciating at an uncomfortable pace, while current productions were costing more AND adding far less value than was previously projected. In short, a massive debt load plus weak revenues, climbing expenses, and depreciating collateral equals a very sizable chance of bankruptcy. 

 

At least that's how I saw things. And, after initially buying the dip and lowering my basis--I came around to the conclusion that I would be lucky to exit RHI with a small loss (I did). When the penny-stock trading brigade pushed RHIE back near par for the position, I felt very fortunate walking out of that theatre before the show really turned ugly....which it did shortly thereafter.

 

http://screencast.com/t/NjYzNjZhZT

 

The above link shows where Baupost bailed on the equity--and I don't know where else in the cap structure they had exposure. Again, Seth Klarman is a bona fide legend (my son will inherit my copy of Margin of Safety), so RHI remains one of the few investments that does not compliment the 20%+ annualized returns Mr. Klarman has produced in his storied career. It was a mistake to be sure, but a very, very small one in terms of position size for Baupost. 

 

Conclusions

 

There are many takeaways from a saga like RHI. When to cut your losses; why certain capital structures never have a chance from day one; why private equity shops use IPOs at opportune times to sell to rubes, and so on, and so on. 

 

For me the most important lesson is simple. Even the best investors make mistakes. If you're going to follow them, it's important to maintain perspective, make up your own mind about the risk /reward for the position, and frequently challenge your own assumptions therein. It just might save you from deploying capital in the next RHI Entertainment. 

 

JDB

 

PS. There are investors with a deeper understanding of what happened at RHI. One such person is Plan Maestro:

http://variantperceptions.wordpress.com/

I'm not sure if they've ever written about the RHI debacle, but the blog is worth reading, and they're worth following on twitter, as well:

https://twitter.com/PlanMaestro

 

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Conservation Finance Aims to Profit from Environmental Stewardship

Conservation Finance Aims to Profit from Environmental Stewardship | Risk-Adjusted Returns | Scoop.it

EKO Asset Management Partners recently landed a big one. In January the New York–based investment management and advisory firm shared in a $53 million grant from Bloomberg Philanthropies that comes with a unique challenge: Figure out how investors can profit from helping to tackle chronic overfishing. Since 2012, EKO has been exploring ways of encouraging sustainability reforms to industrial and smaller-scale fisheries by luring private capital. Better management of the world’s fish stocks could grow their populations by more than half and boost yields by up to 40 percent, according to the journal Science.

 

Over the next two years, the Bloomberg funding will support EKO’s work with U.S. environmental groups Oceana and Rare to design and establish financing mechanisms that can help to improve fisheries practices in Brazil, Chile and the Philippines. The firm is one of a handful of financial institutions that are teaming up with nonprofits to pull investors into a nascent market known as conservation finance.
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Devoted to investments that help preserve ecosystems for the long term, conservation finance sees about $10 billion in annual investment and spans sustainable timberland, agriculture and aquaculture; wastewater treatment; and freshwater protection, according to a January report by Credit Suisse Group, the World Wildlife Fund and consulting firm McKinsey & Co. To meet environmental needs the market must grow to 20 to 30 times its current size, or between $200 billion and $300 billion in annual investment, the report estimates. Assuming that philanthropic and government contributions at least double in the near term, its authors say the gap would close if every high-net-worth individual, retail investor and institutional investor dedicated 1 percent of their portfolios to conservation finance.

 

The market’s multifariousness has held it back, acknowledges John Tobin, Credit Suisse’s Zurich-based global head of sustainability and a co-author of the report. “That doesn’t mean there can’t be investable and very profitable products in the area of conservation finance,” says Tobin, who calls for more thinking on the subject. “Protecting species and supporting protected areas has been a philanthropic endeavor until now. I don’t think many people have approached the topic saying, ‘Hmm, environmental conservation: There’s money to be made here.’”


Via Sam Radcliffe
Jack D Bridges's insight:

Another gem of a find from Mr. Sam Radcliffe--thanks, Sam! (http://www.prentissandcarlisle.com/).

 

In the financial world, nothing is more annoying than 'talking one's book' (touting one's investments, in the parlance of our times). So, I'll try not to be a hypocrite. But, conservation finance is an important topic for investors. And, it will only grow in importance as environmental markets continue to attract more capital. Why? 

 

For investors, it matters because there is indeed money to be made--solid, risk-adjusted returns, in fact. For people who value ethics and integrity it matters even more, because at the very least they want their investments to try and avoid the least desirable outcomes of capitalism. 

 

While my experience within conservation finance cannot be measured in decades, I've been lucky to learn from some very smart figures in the field (www.sustainableresourcefund.com). For all of my reading and discussions with far brighter people, it boils down to this: 

 

It's not just possible to combine value investing and traditional market based models with sustainable, ethical businesses. It's imperative. Essential. Indeed, the attitude that suggests otherwise is one of the biggest hurdles impeding the growth of the marketplace.

 

Let me close with this: It is not easy to find investments that offer inefficient markets, great risk-return profiles, within an ethical framework. But, at least for this writer, it's easy to see the promise that lies ahead for environmental markets and assets.

 

In the future, I hope to post an interview with an expert or two on the subject--so stay tuned, please.

JDB

 

Thanks again, Sam, for finding the article!

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1987 Berkshire Letter and Buffett's Thoughts on High ROE | Base Hit Investing

1987 Berkshire Letter and Buffett's Thoughts on High ROE | Base Hit Investing | Risk-Adjusted Returns | Scoop.it
I look at Berkshire Hathaway's 1987 Shareholder Letter where Warren Buffett discusses a Fortune study of high Return on Equity Businesses.
Jack D Bridges's insight:

Fantastic read on different value investing styles--and how the market typically 'mis-prices' boring businesses in the short-term, only to reward investors with reasonable holding periods. Thanks to Mr. Huber at www.basehitinvesting.com

Highly recommended!

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Its Trees May Grow to the Sky, but Not Its Stock

Its Trees May Grow to the Sky, but Not Its Stock | Risk-Adjusted Returns | Scoop.it
REIT Plum Creek Timber offers a hefty 4% dividend yield to investors. But the shares are rich and it's reaching further aground to find earnings. Are the shares about to fall?
Jack D Bridges's insight:

In a market where Twitter shares trade near $70 (let's assume a triple-digit forward PE...sounds safe), and investors accept near mythological valuations, calling Plum 20% overvalued is kind of funny. 

 

Why? Two reasons.

 

One, people like Mr. Chip Dillon (a veteran industry analyst) are always saying PCL is over-valued. Always. When you consider that investors who require liquidity do not have a great set of choices to invest in the asset class, it creates a market with unique dynamics. How? Fund managers in the space (and many REIT funds who know nothing about the timber business) HAVE to own and buy more shares of PCL--overvalued or not. In other words, the market for PCL is, well, just the market.

 

Two, consider the fallibilty of equity analysts. And, more specifically, Mr. Chip Dillon's forecasting record.

 

Read the article below, and note his comments in 2009. 

 

http://online.wsj.com/news/articles/SB124969600764816273

 

Timberland investing does not attract the top-chasing tech crowd. So, to get bearish on the asset class at the bottom of the market is patently ridiculous. For anyone who understands the virtues of timberland, there is a margin of safety that makes it unique among long-term investors. But , back to PCL and its valuation....

 

Still think Plum Creek is that over-valued, based on a simple sum-of-parts valuation and their constant tweaking of their 6M plus acre portfolio? Maybe. But, it depends on the assumptions one makes going forward-- about any number of factors (US housing market health; housing starts, US log prices in the South; how over-valued US equities are, etc.).

 

To conclude, Barron's could have found far more incisive opinions on why to avoid Plum Creek shares.

 

When something like PCL is correlated to the S&P (unlike pure timber investments), it doesn't take a genius to suggest that its price will fall along with the broader market. And I'm sorry, but interest rate risk, non-core cash flow, and lumber pricing comments from an unknown CIO in Connecticut just don't cut it here. 

 

If there is a dip from this thin bit of analysis, I'd get interested in PCL at around $42 (about 10% lower). 

 

JDB

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2014 webinars from University of Minnesota

2014 webinars from University of Minnesota | Risk-Adjusted Returns | Scoop.it

REITs, TIMOs, and changing industrial forestry

Tuesday, January 21 from 9:00-10:00am

How has industrial forestry changed because of the shift in corporate structure? Minnesota industrial forests have seen a large turnover in ownerships in recent years with investment companies purchasing large tracts of Minnesota forestlands. This webinar will and how industrial forestry has changed because of the shift in corporate structure. Samuel J. Radcliffe will explain the changes in ownership and the difference between real estate investment trusts (REITs) and timber investment management organizations (TIMOs).


Speaker:  Samuel J. Radcliffe, Prentiss & Carlisle Management Company


Via Sam Radcliffe
Jack D Bridges's insight:

This will be my first U of Minnesota webinar--and it should be a good one. Put Jan 21 at 9am on the calendar, and get ready to learn! 

This won't be on the agenda, but here is one subject I would ask about: How CALPERs expects to manage a $2B timberland portfolio with a part-time employee? Is it any wonder their performance numbers are lousy (and their portfolio construction seems, well, very Bush-league, considering their over-allocation to the US South).

 

If I could construct a model showing buying $2B worth of Plum Creek which is also heavily weighted below the Mason Dixon (and collecting the 3%+ dividend) versus their returns net of fees, it would be an interesting comparison. The conclusion: There are far better ways to invest in timberland, especially for such a massive buy-side institution.

 

Anyway, please listen in to Mr. Radcliffe's talk on January 21st. It will be an hour well spent. 

JDB

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Sam Radcliffe's curator insight, December 14, 2013 7:03 AM

Sorry for the shameless promotion ;-)