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Risk-Adjusted Returns
Thoughts on risk, value, and alternative investments.
Curated by Jack D Bridges
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Plum Creek Timber (PCL) Q2 2015 Results - Earnings Call Transcript + Comments...

Plum Creek Timber (PCL) Q2 2015 Results - Earnings Call Transcript + Comments... | Risk-Adjusted Returns | Scoop.it
Plum Creek Timber Co., Inc. (NYSE:PCL)Q2 2015 Earnings CallJuly 27, 2015 5:00 pm ETExecutivesJohn B. Hobbs - Vice President-Investor RelationsRick R. Holley - Chief Executive Officer & DirectorDavid W. Lambert - Chief Financi
Jack D Bridges's insight:

No surprises from the Plum Quarter. It was modestly better than expected, and R. Holley & his team continue to focus on capital allocation (selling non-core assets; buying back stock). But, the meat from any PCL conference call isn't really about Plum: It's about the marketplace.


Here are some highlights...


Anthony Pettinari - Citigroup Global Markets, Inc. 

During the quarter, there was some discussion on CalPERS looking to trim its exposure to timberlands. And given Southern sawlog price recovery has been maybe a little bit disappointing relative to expectations at the beginning of the year for another year, are you seeing any kind of difference in institutional interest for timberlands or maybe the level of price for land, especially in the South? I was wondering if you could just kind of update us on what kind of level of interest you're seeing in the market and the transactions you're seeing?


Rick R. Holley - Chief Executive Officer & Director

I think the level of interest from an institutional standpoint continues to be very high, whether it's in the Pacific Northwest or in the South for timberlands...


So I think there's continued to be a high level of interest. I think CalPERS is going through their entire portfolio and try to trim costs and other things. We've been more than a bit disappointed in some of their timber investments of-late. And I think they've decided with those as they have with many different investments they've made that they're just going to exit. So I think their focus and maybe actions are quite different from what we see amongst any of the other institutions.


Gail S. Glazerman - UBS Securities LLC

Okay. In terms of land available on the market. It's not really just CalPERS, there's the Foley land, Molpus land. I mean, do you feel like there is kind of an incremental supply of timberland on the market? Or are they just getting maybe a little bit more headlines than they normally would at this stage?


Rick R. Holley - Chief Executive Officer & Director

Well, the Foley land has been on the market for several months now and didn't appear to be a lot of activity. I think part of it has to do with the quality there, just not of interest to people. And the CalPERS land that they've had on the market is, have a little challenge because of a supply agreement and some other constraints. We just heard, as you did, about the Molpus bringing 50,000 acres in the Southern United States on the market. And I suspect, depending on the quality, that will get a lot of attention.


So you kind of see these 50,000 acre things in the market from time and again, and I think you're going to continue to see that. And a lot of it has to do with the timing of some of the investments these people made with the TIMOs and they're coming up for renewal. And it's just time to take them to market or maybe a client want some current yield or something and so they take some of these lands to market, and we see that all the time. So that's not unusual. And I think you'll continue to see that this year and next.


Switching gears slightly, what was said about timberland price assumptions & valuations going forward? 


Mark Wilde - BMO Capital Markets (United States)

Last question I had is just a bigger picture question. I mean, you guys are generating on the range of about $60 an acre in EBITDA on the Southern lands. Can that kind of number continue to support $2,000 an acre or $2,100 an acre just from a longer-term perspective?


David W. Lambert - Chief Financial Officer & Senior Vice President

I think market participants are looking at not only the productivity of the lands and what they can produce, but what the expected pricing would be. I think if someone were to say, hey, we're going to get stuck at 1.1 million housing starts and Southern log prices aren't going to go up, I think that would impact valuations in the South. But I don't think anyone that's in this business is looking at that thinks that that's a realistic outcome and that's not the basis for the valuation.


Hmmm. Given what Mr. Holley & Co. were forecasting last year for housing starts in 2015, I would place far higher odds on that "unlikely" scenario (stuck at 1.1 million housing starts). In other words, everyone is still making aggressive assumptions when buying timberland assets in the US South. To me, this forward looking, confident math would be akin to analysts buying oil assets with $80 or even $100 still as a reasonable assumption. Smart? Time will tell...


The Upshot: The team at Plum may not be the best at forecasting housing demand / construction, or handicapping the US consumer, but they know their marketplace. This writer is far from an expert, but when it comes to assessing the impact & importance of CalPERs in the timber sphere, it's better to listen to a major industry player (than, say, the Wall Street Journal).


JDB


Be sure and check Sam Radcliffe's views on the Plum call, too:


http://www.scoop.it/t/timber-invest

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This Fund Sees The Trees--And The Forest

This Fund Sees The Trees--And The Forest | Risk-Adjusted Returns | Scoop.it
How do you profitably invest in a sustainably harvested forest while directing efforts toward clean water protection, flood control, habitat for fish and wildlife, soil building and carbon storage?

Industrial timberland is managed solely for the wood in the trees, but Ecotrust Forest Management, based in Portland, Ore., invests by putting its focus on entire forest ecosystems. It's creating markets around forest diversity by selectively harvesting trees rather than clear-cutting, and also selling everything from carbon credits and development rights to edibles such as honey or salal for floral bouquets.

This diversified approach to managing a forest renders the land more resilient, both ecologically and economically, said Ecotrust CEO Bettina von Hagen.

Since its inception in late 2004, Ecotrust Forest Fund I, with $30 million under management, had average gross returns per year through December 2012 of 10.6 percent compared to 8.17 percent during the same timeframe for the NCREIF Timberland Index. It won't update returns because it will be reopening the fund to investors in the next three to six months. The fee is 1.25 percent.

Ecotrust has raised $60 million for a second fund, which closed in December. It currently has 30,000 acres under management.

Via Sam Radcliffe
Jack D Bridges's insight:

Consider a very mature, highly efficient market, within an established asset class. As time passes, the number of actors / investors grows, amid very positive secular trends which have helped lift returns over a long time-frame. 


Within this framework, all things being equal, one can expect lower future returns, as more investors crowd into the marketplace and compete for assets. 


So, how does one compete and deliver superior risk-adjusted returns in such environment? One way is to focus on a particular niche, and devote resources to developing new revenue streams--and this is exactly what EFM does as well as anyone. 


I'm not sure who Ecotrust hired as their CIO, but knowing a few people there, it is an unquestionably talented & ethical team. I wish EFM II the best of luck as they re-open the fund to investors...


JDB


Thanks to Sam Radcliffe for the find!

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Market Crashes Haunt Investors for Decades

Market Crashes Haunt Investors for Decades | Risk-Adjusted Returns | Scoop.it
Forgetting past traumas isn't easy.
Jack D Bridges's insight:

B. Ritholtz is always a good read. For investors, what matters here is his closing graph:


"the psychological parallels I see now are to 1962, and the collective memory of the crash of 1929, rather than 2007 and the legacy of the dot-com bubble burst. There is a deep reluctance today to believe that the recession is over; to recognize that inflation is nowhere in sight; to admit that the market rally is more than just the result of Fed actions; to ignore positive economic data; and to disregard the huge recovery in corporate profits." 


Why is the above important? It's simple: One of Ritholtz's keys to investing is to recognize our biases, and by doing so, try to objectively weigh the risks / rewards that markets present--regardless of cycle, label, or investing fad. Sounds easy, yes? In reality, not so much...


Which brings me to why investing in timber makes hewing to Ritholtz's precept a little easier. How? Because, a great deal of returns from prudent investment in timberland come from patience to buy opportunistically, planning, and simple biology. In other words, one does not have to fight any cognitive impairments to find solid returns.


But, getting back to Ritholtz, he makes excellent points about what's held back so many allocators over the last few years. Looking ahead, though, and investing capital at a time when the market has so many good years in the rear-view, what's to be done? What now?


For this investor, it pays to keep reading and learning from allocators like Barry Ritholtz. His level-headed approach to markets is a help to professional and amateur investor alike. 


So, for those who find little comfort in the high asset prices of today. Stop fighting the market, and find something else to battle against: Yourself. There are plenty of us who have turned that energy to a better purpose: Struggling against our own investing biases & baggage. Doing this makes the endless pursuit of "cheap" or mis-priced securities a little easier. 


In the meantime, keep J. Zweig's quote about markets & morale in mind. Always messy and always fragile, indeed.


JDB





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Seth Klarman: Why Value Investors are Different...

Jack D Bridges's insight:

If not for the dated photograph of a 'boyish-looking' W. Buffett (did Uncle Warren ever look young...), one might think this excellent piece from Seth Klarman was written yesterday. Nope. It's from 1999.


Notice any similarities between markets in 1999 and now? Yep. Scary. 


It's always a good time to read what Seth Klarman has to say, but it's especially important during markets where value is hard to come by.


JDB


Hat Tip:


Brattle Street Capital

@BrattleStCap


Jae Jun

@Jae_Jun

www.oldschoolvalue.com

Thanks!

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Farmland Without Farmers...Who will care for the land?

Farmland Without Farmers...Who will care for the land? | Risk-Adjusted Returns | Scoop.it
As agribusiness replaces men with machines, the American landscape loses its stewards, and the culture they built.
Jack D Bridges's insight:

All of my grandparents were raised on farms in the Midwest. That's part of the reason Wendell Berry's writing, and this piece especially, resonates with me. Another is the importance of remembering. 


Please, forgive this break from my usual programming. What follows has nothing to do with the equity market, or investment themes of any kind. It's merely this: What one truly gains by respecting, celebrating, and embracing the natural world (instead of extracting every ounce of profit from it as quickly as possible). 


If you will, read W. Berry's paean to farming. Even if it doesn't stir childhood memories spent on farms and fields, it chronicles the loss of an important part of our heritage: A connection to, and with, the land. 


JDB


Hat-Tip:

Ecosystem Integrity Fund 

(Great find, Geoff...thanks!)




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U.S. Farmers Watch $100 Billion-a-Year Profit Fade Away

U.S. Farmers Watch $100 Billion-a-Year Profit Fade Away | Risk-Adjusted Returns | Scoop.it
Jack D Bridges's insight:

For those of us who pore over alt. investments each day, the above look at farm profit margins bears watching. 


Phrases like, “You will see some farmers not able to cover their production costs,” (this from an agricultural economist at Purdue), should worry investors. 


Where we are in the cycle doesn't bode well, either:


"The agriculture industry has boomed over the past decade as record land and crop prices boosted sales of seed and farm equipment. Net net-cash income touched a record $137.1 billion in 2012. Land values have kept rising, up 8.1 percent last year to an all-time high of $2,950 an acre, while beef and pork prices were the highest ever."


No. The best time to invest in an asset class is not when you read the words "highest ever," with costs climbing, and net income shrinking. Typically, as we've learned from Seth Klarman and other value investors, the best time to deploy capital comes when the industry / business / asset class is completely out of favor. Thus, you have a margin of safety, and can make safe assumptions about future returns....


Without being able to model conservative assumptions for an asset (or finding managers who can do this in select markets), this is a time to be very careful when chasing returns in agricultural investments in general. 


JDB

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Seeing the Forest and the Trees at Plum Creek Timber

Seeing the Forest and the Trees at Plum Creek Timber | Risk-Adjusted Returns | Scoop.it
In its 25 years as public company, Plum Creek Timber has run rings around the S&P 500. Longtime CEO Rick Holley sees more gains to come.
Jack D Bridges's insight:

Please, read the Barron's article about Rick Holley & Plum Creek Timber. Aside from the CEO puffery, and that R. Holley seems to be a very decent human being, it's more important for what it leaves out.


First, consider that deploying capital in shares of Plum Creek is an investment in an equity with wide ranging domestic timberland interests. Put another way, PCL is not to be confused for a pure 

timber investment--not even close. 


Barron's doesn't address this crucial point (which I've covered exhaustively in the past). And, below are four issues that would have added far more meat on the bones for investors in Plum Creek Timber (or any timber REIT, for that matter). 


1. Why no mention of how domestic timber businesses actually work--hyper local, lumpy cash-flows, deferred harvests, etc.? This makes earnings handicapping / cash-flow modeling difficult and subject to greater volatility (though, not necessarily more risk).


2. Other than some good background on Plum's genesis, the writer pays little attention to the unique collection of assets / structure of the timber REIT. Ms. Ward also neglects the newer and very different ways PCL generates cash (biomass, aggregates, oil / gas, real-estate, HBU land sales / easements). 


3. Barron's mentions the MWV acquisition , but leaves the bigger regional push / forecast alone. The SE region will have the biggest impact on future earnings / success for Plum, so why not discuss the HBU dynamics a bit more, or delve into the 1.5M housing start forecast issue?


4. Finally, instead of an apple peeling anecdote, why not mention one or two broad issues that face the asset class, and how they might impact Plum? 


Do we face a future of far lower real returns than what investors are being told & sold? What other challenges face Plum in the face of rising interest rates, a richly-priced domestic marketplace for timber assets, and increased expectations from investors in the space? 


It is nice to know more about the Captain of the ship. No doubt. But, it's far more important to examine the vessel in question--especially, when most investors (even professional ones) have a poor understanding of what makes such a ship sink, float, or like this tedious metaphor, crash into the rocks;)


JDB


Further Reading:


http://www.prentissandcarlisle.com/content/4006/news/


Thanks to Sam Radcliffe of Prentiss & Carlisle!



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Why Timber?

Why Timber? | Risk-Adjusted Returns | Scoop.it

A lot of finance professionals don't respect the forest. In the halls of asset managers, after the jokes about tree-hugging die down, one might hear the following: 


"It's boring." "Where's the alpha?" "Trees are not going to make make my clients rich, or feed my family." All true, of course. 


This consensus thinking leaves a lot of money on the table, though. And, it's a huge mistake to regard the asset class as just an unprofitable, boring hedge. So, why timber, then?


What follows just scratches the surface, but, for me, there are three reasons: A high margin of safety, the ability to find inefficiently priced assets, and transparency. 


Margin of Safety

Plenty of ink has been spilled about timber's virtue as a low-risk, hard asset, but let's focus on the biggest component of returns for investors--biology. Up to 2/3 of a given IRR is derived from trees growing from pole timber into valuable saw timber over time. 


(For a deeper dive into the components of timberland returns, please see this excellent piece by a mentor of mine.)


Prices for these growing logs when they're harvested also matter a lot, but one crucial factor that creates even more of a margin of safety is this: If you don't like the price, you can leave the tree on the stump. This applies more to tree farms than native forests (which still need to be thinned & managed even when prices are low), but the general principle holds and harvests can be deferred to preserve greater (possible) future value. 


Now, there is no reward without risk--and, there are indeed risks in timberland investing. Overpayment for an asset or ownership interest, illiquidity,  or needing to sell at an inopportune time (i.e. 2009) are usually the biggest issues. But, there are also physical hazards--fire, invasive species, and threats to the supply chain, such as mill closings. Timber businesses are hyper-local, so rather than worrying about insurable losses--it pays to learn the ins & outs of any woodbasket where one invests in great detail.


So much of the specific risks vary widely based on the particular timber vehicle, whether one is invested in timber REITs, a PE fund, or owning timberland directly. There isn't room here to parse the different issues with each. Instead, it helps to understand what makes a given investment attractive in the first place. Why is worthwhile deploying capital there?


From a value  perspective, where & how does one find inefficiently priced assets?

 

Inefficient Prices & Markets

Excellent opportunities in timberland assets appear in both private and public venues. Examples? Every so often, Wall Street or those blinded by short-term thinking, create chances for long-term investors. This behavior by large investors / traders includes selling after a "bad" quarter of earnings, unusually large impacts by major investors selling--or, on the flip-side, investors who must acquire assets even at significant premiums.


Take two recent cases: Rayonier (Ticker: RYN), and The Keweenaw Land Association (Ticker: KEWL). The former was subject to heavy selling after an earnings restatement / inventory issue; the latter was pushed lower no reason other than an extremely small / inefficient market for the equity and an large holder wanting to sell quickly at any price.


In Rayonier's case, the equity price tanked from $33/share, to $26. After making a few inquiries both at the company and beyond, I judged the selling to be extreme, and shortsighted. In an over-priced equity market, RYN at $26 offered a high-probability opportunity for long-term investors, just as Keweenaw did at $70 in the spring of 2013.


http://screencast.com/t/z8Vkvaf5irV


http://screencast.com/t/2U7lLfBN


These quirks in markets & prices also exist in private venues (right now, they deal with domestic institutional investors who have to buy assets regardless of price). But, on the buy side, let's say select markets within the continent of Africa offer patient investors a chance to develop / own assets that are inefficiently priced. Not a bad place to diversify within the asset class out of North America. 


So, the alpha within timberland investing may not be as obvious (or easily calculated based on a symmetrical index) for those who have to constantly benchmark their performance--though, it is there for the taking, all the same. Particularly, for those who care to learn about the intricacies of deploying capital.


Sinoforest Aside

Transparency is another virtue of timberland. As a hard asset, it can be seen and touched by owners, and its value measured by observable input prices. With the exception of Sinoforest, an enormous Chinese forest fraud that fooled Wellington, John Paulson, and many other large investors, the asset class tends to discourage wild schemes and fraudsters. We, as timberland investors, are a pretty sober lot (My son, at age two, asked that we paint the words, "Trust, but verify," above his bed).


More Than A Hedge

Timber investing may not be sexy, or generate ridiculously high un-risked returns. And, the above is far from a definitive look at the issues. 


Still, for those with the mandate to invest capital responsibly and transparently, it's easy to see that timber is more than just a hedge; far more than just a diversifier. And, with the proper guidance and advice (or, manager), one can find excellent risk-adjusted returns in the forest--for you and maybe the next generation or two of your family.


JDB

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Rayonier's CEO Dave Nunes on Q3 2014 Results - Earnings Call Transcript

Rayonier's CEO Dave Nunes on Q3 2014 Results - Earnings Call Transcript | Risk-Adjusted Returns | Scoop.it

Some excerpts:


Dave Nunes - President and CEO

***
The key focus of the call this morning will be to discuss the results of the internal review we initiated this quarter, our first full quarter since the spin-off of the Performance Fibers business and to provide detail on the immediate actions we have taken in response to this review.
***
Specifically, the company’s Form 10-K for 2013, Rayonier had included in its merchantable timber inventory, timber in specially designated parcels located in restricted, environmentally sensitive or economically inaccessible areas, which was incorrect in consistent with our historical definition of merchantable timber inventory and a significant change from prior years.

As a result of these findings, we determined that there was a material weakness in Rayonier’s internal controls related to merchantable timber inventory as of December 31, 2013.

As outlined in today's announcement, we have accordingly revised our merchantable timber inventory estimate as of December 31, 2013, which in aggregate is approximately 10% lower from the volumes we previously disclosed. This equates to a difference of approximately 8.4 million tons in aggregate.
***
In addition, we concluded that for roughly a decade, the average rate at which Rayonier harvested timber in our Pacific Northwest timberlands exceeded the rate those timberlands could support on a long-term basis. Going forward we intent to manage our timberlands on a sustainable yield basis and let me explain what we mean by sustainable yield.
***
Clearly, this realign strategy will impact harvest levels in our Pacific Northwest timberlands. We estimate the sustainable yield of our timberlands in the Pacific Northwest to be approximately 160 million board feet, as compared to our average annual harvest over the past 10 years of 228 million board feet.
***
And lastly, with regard to the internal review, as a result of the incorrect conclusion of certain timber in our merchantable timber inventory as of year-end 2013, we concluded that we understated depletion expense and cost of goods sold for each of the first two quarters of 2014, which led to a corresponding overstatement in our income from continuing operations for the same periods.
***
Paul Quinn - RBC
Yes. Thanks very much. Just want to understand the overstatement of the merchantable timber inventories. Is that a hard and fast calculation, or is that more of a gray zone, especially around economically inaccessible areas?

Dave Nunes - President and CEO
We recognize that timber inventory by itself involves estimates every year. You are doing statistical sampling. And in this case, there were stands that were -- that had been previously excluded for the various reasons described in our release that as of the end of '13 were included in those volumes. And so we went back and took a detailed look, we went literally item-by-item. And it was more a case of excluding things that had been added into as opposed to changing the methods that we were assessing particular stands of timber if that makes sense.
***
Paul Quinn - RBC
Okay. And just a question on overall U.S. timberland market. As you guys were active in the market buying and selling, how do you characterize that market right now in terms of potential for M&A going forward?

Dave Nunes - President and CEO
Well, I think it’s -- I think it's a -- we have certainly seen a pickup in the activity of timber transactions this year. And I think that's driven by a number of factors. One, from the TIMO side where you have a large supply of lands, you are starting to see turnover in fund life as funds near the end of their term length. You're starting to see managers putting those properties up for sale and not something that we anticipate going forward will continue to represent a large component of the supply of timber.

And so we've seen that in both the South as well as in the Pacific Northwest. And I think our activity level is indicative of that, the fact that we have been able to place or either purchase or have under contract, as Ed had mentioned, $152 million of timber through the year is a significant increase where it was last year and some of that certainly is a function of the greater activity level of transactions.
***
Collin Mings - Raymond James
Okay. I apologize, one last one maybe just broadly on the acquisition environment in the U.S. South. Can you talk about I know you may now want to reference specific what Rayonier uses but just talk about maybe the range of real discount rates that you think are being utilized on most of the acquisitions out there right now?

Dave Nunes - President and CEO
Well, I think that has -- I won’t speculate on what various folks are using for the specific real discount rates. I would say that as we've seen net inflows of capital into the market. And we've seen the impending recovery in housing, I think, you are seeing some compression of real discount rates. That’s my sense in the market both in the South and the West.


Via Sam Radcliffe
Jack D Bridges's insight:

http://www.bloomberg.com/news/2014-11-10/rayonier-cuts-dividend-after-find-material-weakness-.html?cmpid=yhoo


I. Big Moves Afoot


Lots to talk about here: Asset write downs, significant forward harvest reductions (why was RYN cutting so much in the first place?), and Wall St. giving investors a gift.


First, please read Sam Radcliffe's insights on these issues. According to Sam,


"What Wall Street doesn't really understand is that the inventory write-down is probably not too far outside of the statistical confidence interval for the company-wide inventory estimate. That is, from a statistical perspective, the volume write-down is insignificant. 


All of the timber REITs (as well as private timberland investments) have a similar level of inventory risk that, again, Wall Street doesn't have the first clue about and particularly does not understand how inventory uncertainty impacts valuation.


The share price drop has brought the per acre price of Rayonier to about $1,300, substantially below the prices of large private transactions in the past couple years."


Excellent points. So, regarding the asset write down, the inventory re-statement is more red herring than red flag. Got it. 


II. Keeping more on the Stump


The second issue, reduced average annual harvests (from 228 MMBF tons, to 160 MMBF) is no small matter. For owners of RYN equity, this huge reduction in harvest levels will have short term consequences (hammered stock price & lower distributable income), and long-term benefits.


Rather than blaming Dave Nunes for making a very sound, very smart decision regarding sustainability, the real issue is this: How can an average harvest level be so far out-of-whack to see a 30% reduction? True, those heavier inventory reductions paid nice dividends--and captured several years of higher log prices. But, to pull back tonnage estimates so dramatically raises some questions...


Finally, taking in all of the above and factoring in Wall St's obsession with short-term thinking, what nets out? Is Rayonier worth looking at for long-term investors?


III. Analyst Downgrades = Time to buy


For this writer, who's watched and waited while RYN spun out another business, and brought in an excellent CEO in Dave Nunes, the answer is yes. Absolutely. Even if distributions get chopped going forward for the next few years--and they likely will by 25%+--Rayonier at $26.30 presents an attractive entry point for the shares. 


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


Is this "the" bottom for shares of RYN? Probably not. The broader equity market still is expensive (marched right back to record highs, didn't we?), and the REITs have an uncomfortably high correlation to the SPY (they are equities, after all). But, given the current assumptions about Rayonier, the current wave of selling presents an opportunity for those with patience, and an understanding of the asset class.


When time allows, the Rayonier story is worth a much closer look. Count on more coverage of it. 


JDB




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Sam Radcliffe's curator insight, November 11, 2014 10:35 AM

Rayonier clearly dropped a bombshell and its share price took a 15% hit yesterday, which is continuing today. What Wall Street doesn't really understand is that the inventory write-down is probably not too far outside of the statistical confidence interval for the company-wide inventory estimate. That is, from a statistical perspective, the volume write-down is insignificant. 


All of the timber REITs (as well as private timberland investments) have a similar level of inventory risk that, again, Wall Street doesn't have the first clue about and particularly does not understand how inventory uncertainty impacts valuation.


The share price drop has brought the per acre price of Rayonier to about $1,300, substantially below the prices of large private transactions in the past couple years.

Sam Radcliffe's comment, November 12, 2014 11:33 AM
Thanks for the re-scoop Jack. Re why would you cut so much timber in the West: if you had to cut somewhere in the past ten years (to meet dividends?), Washington/Oregon would be the place to do it with access to Chinese export markets and consequential favorable pricing relative to what could be obtained in the South.

I find no compelling reason why in the short term (10-20 years) a company or property should be on a strictly even-flow harvest schedule. Long term sustainability can be achieved on a very choppy course. Furthermore, why measure sustainability with respect to a single region when your company portfolio stretches across continents? Was the "overcutting" in the West offset by "undercutting" in the South? (Would have been a smart play.)

Final rant: what does sustainable mean? The acres that Rayonier (or any TIMO) harvests are immediately regenerated into new young forests, they are not turned into parking lots or brush fields. From an investment perspective, there is nothing magical about a portfolio that is evenly distributed across all age classes. In fact such a distribution may or may not make sense even from an ecological perspective. So I sort of scratch my head when I hear Mr. Nunes talk about the sustainability goals of the company. What is to be sustained, over what time period, and for what reason?
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Buying Capitulation....again.

Buying Capitulation....again. | Risk-Adjusted Returns | Scoop.it

OK, this will be a brief follow-up post about Energy XXI (EXXI). So, please, start by turning off whatever financial news you have on in the background. Good. You shouldn't be watching that rubbish now that markets are finally interesting again, anyway. 


What about EXXI? Yesterday, it closed at a new low, $7.85, on 14,983,800 shares traded (4M less than the previous day). Today, we established $7.20 as the new low before bouncing back a bit. So, clearly, institutions were / are not done dumping positions, but the selling pressure is starting to abate a little--and a range is forming. 


Regardless of how ugly the broader market looks here (and seemingly the crumbling indexes are just getting warmed up), my interest in Energy XXI is high. 

JDB

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Plum Timing: Plum Creek finally worth owning under $39

Plum Timing: Plum Creek finally worth owning under $39 | Risk-Adjusted Returns | Scoop.it
Jack D Bridges's insight:

Why Plum, Why here?


Anyone who reads this blog knows my take on Plum Creek. To recap, it's not a 4SC Veneer quality log; it's got clear and obvious imperfections.


To wit: Plum's housing forecast is still too optimistic, and their assumptions about southern softwood sawlog prices are equally aggressive. The Plum balance sheet also isn't exactly a fortress, either. A big debt-load, $3.8 Billion, in relation to its market cap ($6.9B) will be a burden if the US enters another recession, and more harvests get deferred. 


So, why do I think $39 a reasonable place to start slowly buying shares? What are the catalysts that offer investors a margin of safety? Here are three.


One, I'm betting two years of woefully underperforming other public timber investments will come to an end. Please, see the following chart:

http://screencast.com/t/Fbeu7f2H


This compares Plum (the white line) over a two-year period to Weyerhaeuser (WY), Pope Resources (POPE), Potlach (PCH), Rayonier (RYN) and CUT (a timber ETF). This is not the bottom for PCL ($35 would be a good place to scare people), but it's a good place to begin buying (yields 4.3% right now--historically about average). 


Two, Rick Holley has publicly stated that $40 is a place Plum will consider buying back stock. No matter what one thinks of financial engineering, allocators who buy common stocks tend to applaud them--however short-sighted and poorly executed the buybacks often are.


Three, Plum's dilutive purchase of 500K acres from MeadwestVaco in 2013 offers shareholders potential for a la carte HBU asset sales going forward. True, the acreage wasn't exactly a bargain, since the HBU acres therein were well known & appraised by MWV. But, that doesn't change the attractive, strategic nature of the acquired lands, or the little credit the market is giving PCL for increasing an already huge footprint in the SE wood basket. In other words, this is another example of a short-sighted market trying to value a long-cycle, long-term asset class. 


Everything is AAA at the right price, Mr. Graham...


Pulling back from the forest, and looking at the broader equity market for a moment-- its clear this old bull is due for a nap. Value might become easy to find if this current rout turns into a bear market. But, for now, allocators sitting on large cash piles should turn their eyes to Plum (at least if they have to buy common stocks). It's beginning to offer value under $40. 


http://screencast.com/t/PutspbMfS8


JDB

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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? So, where do we go from here, then?

 

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 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, 2014 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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Orion Magazine | Buying the Farm

Orion Magazine | Buying the Farm | Risk-Adjusted Returns | Scoop.it
Ross Wilken, twenty-three, and his father, Harold Wilken, don’t look much like starry-eyed radicals as they inspect their fields of black beans just west of Danforth, Illinois.
Jack D Bridges's insight:

Wonderful read about investing in the ag space--and more specifically, the benefits of taking a longer, more mindful view.


It's hard finding patient / permanent capital, but the societal benefits of long-term management are hard to deny (see the part about investors who need income in year 1, versus years 3 or 4).


Thanks to Jed Emerson (@blendedvalue) for finding the piece!



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S&P 500 Performance and Valuation | The Big Picture

S&P 500 Performance and Valuation | The Big Picture | Risk-Adjusted Returns | Scoop.it
Source: JP Morgan
Jack D Bridges's insight:

I'm back. What did I miss? What's that you say? Grexit, China's Casino Crash, and some progressive words from Donald Trump. Wonderful. 


Reading the headlines, it's easy to see that it's been a volatile summer for markets. But, thanks to all the people shorting equities, the indexes are once again a mere stone's throw from all-time highs...


What better way to check-in than to look at a snapshot of "the market." Better yet, let's take a look at valuation seen through several different frameworks (courtesy of JPM, and Barry Ritholtz). 


Conclusion: The equity market, as a whole, isn't cheap. Though, by most measures, this is not bubble territory. In short, tempering expectations of future returns, and having higher levels of cash ready to deploy, are both good ideas.


For those of us who don't mindlessly beta-chase, and follow the religion of inefficiently priced securities, the above doesn't matter all that much. The search for value continues, no matter what the broader landscape looks like. Time to get back to the grind...


JDB






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Calpers Puts Portion of Timber Holdings Up for Sale

Calpers Puts Portion of Timber Holdings Up for Sale | Risk-Adjusted Returns | Scoop.it
The California Public Employees’ Retirement System is placing a portion of its U.S. timber holdings up for sale in the latest sign of a larger strategic re-evaluation inside the nation’s largest pension fund, according to people familiar with the matter.
Jack D Bridges's insight:

One funny note from the WSJ writer:


"Any move Calpers makes away from the timber industry will likely influence other investors because of its size and history as an early adopter of alternatives to stocks and bonds."


Wrong. Hilariously wrong, actually. 


Take a look at CALPERS track record over just about any time frame you like, in just about any asset class: Meh. At best.


Managing a huge pile of money does not automatically make one "influential," or even, say, good at your job. No. Many times the complete opposite is true, due to the plethora of constraints placed on institutional allocators: Committees with their sloth-like decision making; politics; politically connected stupid people, etc. 


CALPERS may have latched on to timber during a phenomenal (and unique) cycle in the 80s and 90s. Kudos. It might have even been prescient in deploying a larger percentage of capital to the asset class then. But, the last twenty years of CALPERS alt. investing--and timberland in particular--make the "influential" label a farce. 


If anything, huge investors like CALPERS are there so that the more nimble (often far smarter) PE firms have someone to sell to during periods of peak asset prices. 


And, hence the words from an actual person of influence in the timberland space, Mr. Jack Lutz:


“A lot of people would be kind of happy to see CALPERS dump all they have. There’s probably a lot of money to go after that.”


His comments confirm the role of elephants like CALPERS in the marketplace, but they also speak to another important point: There is still a lot of money chasing too few assets in the major US woodbaskets (PNW & SE). So, maybe CALPERS won't get hosed if they unwind their forestry portfolio...but this isn't due to any particular skill or expertise on their part. It just so happens they're reviewing their exposure at a good time. 


It's a portfolio decision like any other...and their logic isn't all that impressive (why would they concentrate so heavily in a woodbasket so levered to housing / lumber demand, if they're not patient to wait out the whole cycle?)


But, to return to the point:  Smart investors don't piggy-back on the ideas of $300B pension funds. The bright minds are the ones who bought at the trough of the last cycle, and are unloading on CALPERS when that dim light bulb appears over the collective heads of the 80 person investment committee. Timber you, say? What a great idea! 


The real headline from this story: Don't Do What CALPERS Does. Ever


JDB



Also, timber sage Sam Radcliffe has weighed in on the potential CALPERS sale(s), so be sure to check out his perspective:


http://www.scoop.it/t/timber-invest


When Sam writes about the timberland marketplace (and this doesn't happen all that often), one would do well to take notes.


Thanks, Sam!



Post-Script


If there are timber professionals reading this, wondering, "How would you invest differently, Mr. Smarty?" It's a fair question--that requires a long answer. But, here are two ideas that don't require genius level thinking to execute.


1. Buy Young Properties. If the broader marketplace for well-stocked acreage (with plenty of sawtimber to harvest near-term) is pricey, what does one do? Invest in far younger age-class properties, and then let your FMP, your silviculture, and your patience create the value. This doesn't require amazing market timing. It just requires a plan and a true commitment to timberland investment.


2. Buy Cheap. Flexibility in allocating capital is essential. If one is forced to deploy capital in specific percentages, at specific times, managed by specific managers, it's often hard to buy inefficiently priced (higher odds of being cheap) assets.


So, I grant a small concession to CALPERS in this regard. But, still, even if you are a major player, you can play a very significant role as a "liquidity provider" when others are forced to sell at bad times (say, 2000, or 2009-10 for timberland). One might even keep a reserve of capital ready to invest or co-invest for times just like these...


That's it. Two quick ideas for how to improve the process & returns of big institutional elephants like CALPERS. You're welcome;)


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The Private Equity Firm That Grew Too Fast

The Private Equity Firm That Grew Too Fast | Risk-Adjusted Returns | Scoop.it
Flush with cash, Providence Equity Partners made a series of risky, and disastrous, bets during the private equity boom. Now its chief executive is aiming for redemption.
Jack D Bridges's insight:

There are more than a few good investing lessons from this piece about Providence Equity Partners (PEP): avoiding style drift, losing valuation discipline, and the dangers of hubris, all come to mind.


Style Drift

PEP was known for its wagers in telecom & media. Before they went on to raise billions more from institutions, Messrs. Nelson, Creamer, and Salem knew those industries exceptionally well. Quantifying "well", what kind of IRRs did they generate?


Without access to their audited returns, the numbers from the Times are quite good: "a 1996 fund returned 3x invested capital; a 2000 fund returned 2.5x."


Clearly, PEP's investment process worked, and they managed the investment cycles very well--i.e. they purchased equity stakes near the trough, and divested when valuations reached dizzying heights (unloading VoiceStream to Deutsche Telekom in 2000 is just one example).


Valuation Discipline...anyone, anyone

In 2000, PEP oversaw $3.6 billion in capital. By 2007, PEP managed $21 billion--and started a credit arm. Wha?


For anyone who knows how organizations evolve (especially PE firms) this should have been a warning sign. Combined with the not-so-hidden credit bubble, and the state of the US financial system in 2007-8, LPs were signing on for far more risk-taking than they bargained for--in un-tested markets and industries for their now-overweight GP.


To be fair, PEP has plenty of company in making terrible investments during the 2007-8 period (Harry Macklowe, Cerberus, TPG, the top-tickers are too many to list here). And, many of these actors are still struggling to get back to par with their '07-'08 portfolio companies. But, getting back to PEP and what we can learn, it's clear that the push to raise as much money as possible and expanding beyond telecom & media was ill-conceived. 


Hubris

There is no shortage of hubris in private equity. It would be interesting to compare the humility of allocators who either buy "damaged" or   "boring"  businesses, versus those who buy pure growth equity stakes in more "fashionable," or growing companies. Leaving the value vs. growth argument aside, and the large egos behind it, how can investors avoid these mistakes? 


One, when allocating capital to managers, do your homework. Don't just compare a manager to a simple (often ill-suited) benchmark. Lazy fiduciaries will give money to managers with great recent performance because they view the decision as low-risk. Everyone is doing it--so if I'm wrong, at least I'm in "good" company. Bollocks. 


Two, are you giving money to a manager who is branching out beyond their core competency? Why? Plenty of case studies suggest very few investors across asset classes and styles can do this well. 


Three, If you're concerned about businesses fetching frothy valuations, or assumptions and projections that seem ridiculous, it's imperative to go over these concerns with managers. Some PE shops are far more mindful of this issue than others. And, this isn't market timing, either. This is avoiding making a huge mistake with an illiquid, unique investment. 


Finally, managers should be willing and open to reviewing past mistakes with potential investors. If all they do is blame "factors beyond their control," keep digging deeper. Every investor makes mistakes; the good ones can tell you what they learned from them, and what they do to avoid making the same one again with OPM.


Taking a moment to learn from the missteps of investors like PEP isn't an exercise in Schadenfreude: it's simply an opportunity to humbly learn from the experience of other allocators. 


JDB




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Velcome to the Pardee...

Velcome to the Pardee... | Risk-Adjusted Returns | Scoop.it
Pardee Resources is an innovative natural resources management & investment company with coal, oil and gas, timber, and renewable energy properties.
Jack D Bridges's insight:

At a time when equity valuations are stretched, and expectations for future returns are low (or should be), it can be hard to find value. Really hard. 


So, during times like this, this allocator goes back to the well, and to what he knows best: Hard assets, illiquid securities, and companies generating FCF ignored by most PMs. 


Pardee Resources is unusual for many reasons--but, mostly because it embodies all of the above. 


This is not a deep-dive into the balance sheet & core assets of Pardee. For that, you'll have to do your own work (and start by requesting several years worth of 10-Ks from the fine folks in Philly). 


No, this is a brief look at why PDER is worth putting on your radar, and why, for this writer, Pardee is a great place where one can learn about how investors think across a diverse set of businesses. 


1. Sharp, honest, driven management


The quality of Pardee's management springs from several sources: company history, culture, and a desire to learn from mistakes. But, it also has to do with the advantages that come with generations of running a diverse set of hard asset businesses under one roof.


There is no slick showmanship, designed to mask weaknesses or highlight particular company triumphs. No. Operating results (and measurements of past acquisitions) are presented transparently, and with the utmost integrity. For observers of typical management teams, and their phalanx of investor relations people, it's a wonderful thing. Truly.


2. Illiquid Discount 


Because it trades OTC, and is a closely held businesses controlled by a family, Pardee's float (tradable shares) is quite small. Add to this a small marketplace for the equity, and one has an inefficient market--which is exactly what long-term investors want.


We will gladly trade liquidity to buy shares of excellent businesses at a discount--especially, one like Pardee with a great asset base, and high-quality management. PDER also pays a dividend (and a safe one, at that), so one gets paid to wait, as well.


3. FCF


Those who look at Pardee's founding business (coal) and think it's a dead-end, generating zero free-cash, think again. The 2014 annual isn't handy at the moment, but Pardee generated enough cash to make a $60M acquisition last year....and buy back $13.6M worth of stock at $265.00 / share (not always a great use of capital, but for illiquids, they can make more sense at the right price). 


To digress a bit, if I were allowed to put one question to management it would be this: Did Pardee overpay for the oil / gas royalty portfolio it purchased considering the crash in domestic energy prices? Or, did the size / discount of the portfolio provide a buffer against the current climate of lower prices? No matter what management would offer in response, Pardee is a company to watch.


Conclusion:


Considering the many competing choices investors have to cobble together a hard asset portfolio, Pardee is worth a serious look (unless you are an "activist" investor, then, please, just bugger off!). Particularly, if we head into a bear market, and investors are able to scoop up shares at bargain prices. 



Further Reading:


http://seekingalpha.com/article/2792165-pardee-resources-asset-value-exceeds-market-value


http://www.valueinvestorsclub.com/idea/PARDEE_RESOURCES_CO/97301


http://sco.lt/9N30td


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Plum Allocators: A look at Plum Creek's 4Q Conference Call highlights

Plum Allocators: A look at Plum Creek's 4Q Conference Call highlights | Risk-Adjusted Returns | Scoop.it
Jack D Bridges's insight:

In keeping with the "Timber is Boring" theme, there were no surprises in Plum's final Q report for investors. But, as usual, it pays to mind the details.


Here are 4 issues worth following from the conference call with Rick Holley--not just for PCL investors, but for anyone who invests in working forests.


1) According to Rick Holley , "Over the past few years, well-managed industrial timberland values have grown, while we have seen the values for rural and recreational lands hold fairly steady. In some regions, these HBU lands continue to offer attractive premiums to the underlying timber value. This is particularly true in the Lake States in New England." 


So, expect Plum to sell or ease more lands in these regions that are not part of the bigger strategic portfolio / picture.


Taking this a step further, what does the private market for quality timberland look like, and how much dry powder is out there to be deployed? 


2) Rick Holley - Chief Executive Officer, Director


"Well, 2014 was a busy year as you all know. I think there over 2 million acres transaction for a little over $2 billion. We are not aware of any transaction in the marketplace now, but there are clearly a lot of buyers and they tend to be institutional buyers.

I think the number one focus tends to be the U.S. South.


He continues...."I think other buyers would look at U.S. South for the same reason we like the U.S. South. It has not experienced recovery and will as we see a broader recovery in the U.S. economy, so I think U.S. South tends to be the focus of most buyers, but a lot of the institutional buyers are looking for a diversified portfolio as well, so there are lands in the Lake States, or lands in the west, particularly Oregon that they are very attracted to, to kind of build out their overall portfolio.


I think there is still quite a bit of capital. I do not know the exact number, but you know $2 billion, $3 billion probably in the side lines at any point in time, so there is ready capital for transactions as they come to market.


3) As several savvy observers have noted, there is a spread right now between the prices fetched by private market sales of timberland, and the values assigned by the public market. Holley also talked about taking advantage of this arbitrage (selling "expensive" lands to TIMOs; buying "cheap" PCL equity with the cash)....if you read nothing else, please see the bold section below.


4) Rick Holley - Chief Executive Officer, Director


"During 2014, we continued Plum Creek tradition of disciplined capital allocation. We sold $65 million of core timberlands at values of nearly $2,400 per acre in the South and $3,750 per acre in Oregon.


We repurchased $50 million hundred $50 per acre in Oregon; we repurchased $50 million of our stock at an average price of $40.21 per share, a compelling discount to our view of the company's underlying value as evidenced by these sales transactions. In doing so, we captured an attractive arbitrage selling at private market value and effectively buying timberlands at a deep discount to intrinsic value to our share repurchase."


This isn't how everyone in the timber world views capital allocation. But, when you're Plum Creek, you have a large dividend to support and banks are throwing cheap debt your way...it certainly makes sense to "capture" this spread, provided the lands are fetching good prices. And, as anyone will tell you, because of QE and hyper-low interest rates, the scramble for yield continues. 


Conclusion:


For PCL shareholders, the big takeaway is this: 2015 should be fairly steady (no dividend hike expected), while Plum focuses on continuing to capture the arbitrage detailed above. Let's leave the issue of log-pricing (pulp very robust due to bad logging conditions, and light mill decks; veneer & saw-timber in most regions, not so much) for another day.


The entire CC can be found, here:


For those who care (or have to care) about the equity market's moves day-to-day, Plum Creek opened down several percent, hit a low of $43.37, and is now trading off less than one percent at $44.50 / share. 


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


JDB

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Sam Radcliffe's curator insight, February 11, 9:06 AM

Great comments from Jack Bridges, check his page at http://www.scoop.it/t/risk-adjusted-returns.

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Barbarians at the farm gate

Barbarians at the farm gate | Risk-Adjusted Returns | Scoop.it
IN THE next 40 years, humans will need to produce more food than they did in the previous 10,000 put together. But with sprawling cities gobbling up arable land,...
Jack D Bridges's insight:

Rather than jumping on the ag-investment bandwagon, it pays to focus on how one executes an idea: how do local market dynamics impact returns (huge), how leveraged the asset (leverage + illiquidity = trouble), and where markets aren't yet too crowded to generate reasonable returns. 


My interest in this space skews towards using technology to improve ag assets / yields. Companies such as Farmlogs are poised to help farmers and investors benefit from this growing ability to learn from massive (often new) data sets.


Anyway, the short read read above is a good indication of how much capital is flowing into farmland....and that's usually (though, not always) a worrisome sign for future returns.


JDB


Further Reading:


http://www.valuewalk.com/wp-content/uploads/2014/07/JK_IntroToFarmland_714-1.pdf

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Don't Be A Muppet--say 'No' to funds like this...

Don't Be A Muppet--say 'No' to funds like this... | Risk-Adjusted Returns | Scoop.it

I. 125 Basis Points, for what?

Who buys mutual funds? In my family, as the son of a value investor, we picked our own securities. And, this writer to this day, still does not understand the logic behind the billions of dollars invested in mutual funds. In the age of cheap beta and robo-advisors, the zero alpha mutual fund at 150 bps per year makes even less sense.


Today, small investors can access more sophisticated information, more products across asset classes, for less money than ever before. Despite this, there are still thousands of funds that charge investors an arm and a leg for faintly disguised beta---or worse, don't invest in what they claim to.


Let's focus on one such fund, what's wrong with the structure / execution and fees, for starters. If nothing else, this exercise will do one thing: prevent investors from getting the Muppet treatment.


II. Returning Squat

The fund in question? Let's call it the Squatney Global Natural Resources Fund. It costs 123 basis points a year (not including a 5.75% sales charge...ouch), yields zero, and according to the literature, "invests in industries that can profit from the global demand for natural resources--oil & gas, to chemicals and forest products." 


http://screencast.com/t/feXvMEc1iWn


Why pick on this fund? For starters, check out the table above. Notice anything amiss for a fund with a mandate that makes no mention of any special concentration within a single resource or industry? With Brent crude at $110 / barrel, maybe not as much. But, with global crude prices near $75 / barrel, it's easy to see this is no balanced fund--in fact it's almost 60% energy weighted. 


So far, instead of a blend of global energy, agriculture, timber, or water businesses, investors are paying 1.25% per year for an energy heavy portfolio, with a 60% weighting towards oil / gas equities, and pays out zero in dividends / distributions. Not a good start.


III. Where is the Wood?

Considering forest products are mentioned in the fund mandate, where is the wood? Maybe in the 47 other stocks not listed above, which comprise the other 40% of the fund. Still, one would expect to see one timber concern (Weyerhaeuser, Plum Creek, or Rayonier, perhaps) approaching a 4% position in a "global natural resource fund." Such an allocation within the proscribed mandate would seemingly help the long-term performance of the fund. But, how long does the PM wait to realize gains / losses in the portfolio?


The answer: Not nearly long enough.


IV. Turn-Over

The holdings of the 'Squatney Global Natural Resources Fund' turn over 100% every year. That's right. 100%. Thought the manager made a great call picking company 'X' last year? Well, chances are, he's sold it before you even knew you owned it. This rapid turnover would be right at home at a hedge fund. At a long-term oriented fund, whose mandate is capital appreciation, it seems grossly out of place. 


V. A Better Way

To sum up, 1.25% per year for an energy-heavy portfolio, that yields nothing, relies solely on cap. appreciation, turns over 100% a year, and levies potentially significant fees when liquidity is needed.

No, thank-you.


Here is a better way for those interested in actually constructing a global natural resource portfolio--and we'll do it for under 100 bps.


Without picking stocks, and using only ETFs, here is a simple, cheap allocation.


VDE--Vanguard Energy ETF

(14 basis points)

VAW--Vanguard Materials ETF

(14 basis points)

WOOD--S&P Global Timber & Forestry Index Fund

(47 basis points)


Even an equal-weighted version of the three ETFs costs about half what Squatney charges, is more balanced across regions / sectors, and actually yields more than it costs per year. If one considers owning individual equities (this is how I choose to invest capital), there are far more possibilities in portfolio construction. But, for small investors, the takeaway from all of this is clear:


Don't invest like a muppet. Make sure you're compensated for the risks you take with your portfolio. In other words, heed the lessons of our Squatney fund, and stay well away from expensive, poorly structured mutual funds.


JDB



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Dodging a Falling Tree: How NOT to invest in working forests

Dodging a Falling Tree: How NOT to invest in working forests | Risk-Adjusted Returns | Scoop.it

I. The Price is Wrong


There is no better way to lose money than overpaying for an asset.

And, despite the lower-risk nature of the timberland asset class, this cardinal rule still applies to forestry investors--it's paramount, in fact. 


Given present market conditions across the US (which Sam Radcliffe of Prentiss & Carlisle eloquently lays out, here), the risk of overpayment is worth discussing for large & small investor alike. 


Qualified purchasers (those with at least $5M in investible assets) have an array of ways mitigate this risk: Owning timberland directly; investing in TIMOs or funds with access to inefficient markets; or building a portfolio in publicly traded concerns (one can do well selling when market valuations become stretched, and then providing liquidity to panicked investors during market dislocations).


So, the first two options are obviously the province of the very well-heeled. Why? Concentrated ownership without any need for liquidity requires significant means. For this contingent, the tax / easement virtues of directly owning timberland matter a great deal, as well.


Those taking the TIMO route, minimum commitments in such funds often start at $1M. Quite a lot of capital to tie-up in one place--even for an investor with a net worth in excess of $10M. One way around such a hefty concentrated bet is a PE timber fund-of-funds, which offers (nearly always at a considerable cost) a diversified vehicle across different geographies, species, growth rates, and risk levels. 


The final option is the most liquid, but here's the rub: Liquidity shouldn't be a priority. This is a 10-year+ commitment that requires time and proper management practices & strategy to build value. And, if one needs to know the marked value of a hard asset beyond 'once-in-a-while,' maybe it's time to find another place to invest.


Indeed, the concept of marking a portfolio value on a daily basis is practically laughable to timberland owners. But, for individual investors, building a portfolio from the small universe of common stocks, is the about the only option. 


This writer has covered the drawbacks of investing in timberland in this manner before (not a true timber investment; equity correlation; no tax benefits, etc.)--but it can present investors with opportunity now and again.


Say, when equity investors panic (thank-you, month of October) there is no better time to start looking for bargains. Because of this liquidity mismatch (hyper-short time horizon, long-term asset class), it pays to watch and keep track of trends in the common equity space in timber (the REITs, DEL, POPE, KEWL, CUT, WOOD, etc.). In other words, it's imperative to be picky about when and how to build / manage a portfolio like this, to avoid a high risk of overpaying.


So, which of the three options poses the greatest risk of overpayment?


Obviously, it depends on the manager, market, and common equity market conditions. And, for small investors, who do not have other options, it's vital that the timber portfolio is built over time. For QPs, a blend of all three options--creating a diversified portfolio across wood baskets, continents, and tax regimes, is the ideal way to mitigate overpayment risk. 


Conclusion: 


Firms selling investments in the forest often set expectations unreasonably high. Whether considering an interest in a PE fund, or building a portfolio by buying equities in the space, it pays to approach this process with patience. Otherwise, armed with a misguided belief in the infallible attributes of the asset class, fecklessly chasing prices will increase the odds of a tree falling squarely on one's head. Just ask the owners of Wells Timber REIT--now Catchmark Timber Trust (CTT), or anyone who bought shares of PCL at $50 in 2013.


So, the best way to dodge a falling tree, is to lay out a long-term investment plan; one that takes into account the long arc and nature of timberland investment, across the four main US regions, and beyond. Even if small investors only have one way to enter the forest, a long-term, disciplined value-based approach will make a big difference in forestry portfolio performance.



JDB


Further Reading:

http://www.prentissandcarlisle.com/assets/PCnwslttr_3QTR-14.pdf


http://www.osiny.org/site/DocServer/Weyehauser_TimberPrimer.pdf?docID=2442


Brookfield Timber: Q1 2014 market view--from Mr. Reid Carter





















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Buying Capitulation...a look at Energy XXI (EXXI)

Buying Capitulation...a look at Energy XXI (EXXI) | Risk-Adjusted Returns | Scoop.it
Jack D Bridges's insight:

Just because the S&P is near an all-time high does not mean everyone is invited to the party. Digging deeper into the equity market, a lot of equities / sectors have not only missed the last leg of the bull market--They've already entered bear markets (as defined by a 20% drop). 


*Please, see B. Ritholtz's sharp piece about horrid market internals). 


With this backdrop, let's look at one downtrodden equity that's been absolutely punished lately : Energy XXI, ticker EXXI. 


I won't re-hash the long thesis here (harvest exchange is a decent place to brush up on it), but today witnessed an absolute purge of EXXI from investor portfolios. Get-Me-OUT...at any price! 


For those of us who know our Seth Klarman "Margin of Safety," this is when patient investors want to start buying. And, I did. 


http://screencast.com/t/yBXDSQUUMF


Is EXXI a speculative concern, in a business that's been complacent about high energy prices? No doubt. But, owning the name under $10/ share provides a decent moat, even if global growth is slowing, and oil supplies abound at present. 


During the financial crisis, days like today for EXXI (and charts like it) were dime a dozen. All over the place. As most professional investors know, buying when others are panic selling is typically a very good way to invest for the long-term. 

JDB






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The Death of Investing Part 1: Middle-Man-Itis

The Death of Investing Part 1: Middle-Man-Itis | Risk-Adjusted Returns | Scoop.it
Jack D Bridges's insight:

There is a trend in institutional investing that is spreading like a virus. Not a mild, "oh, take some antibiotics and you'll be fine," virus. No. This is a deadly, paralyzing strain that is preventing blood flow to the brain at some very large, prestigious E&Fs. So, what is this threatening germ? Middle-Man-Itis. 

 

Yes. It's true. Instead of merely hiring a large consultancy to advise and help implement asset allocation, manager hiring / firing, and other matters, it turns out that now one team of consultants is not enough. Not even close. Why hire one team to execute a variety of tasks, when you can hire a separate team for each one? This is not a joke. 

 

Please, read the bit of "Thought Leadership" (this term needs to be put out of its misery) below:

 

http://www.mercer.com/insights/point/2014/the-costs-of-switching-investment-managers.html#prclt-l2W5ftrK

 

Help me out here: Why would an institution with a CIO and an investment staff, who already employs a consultant, need to hire a separate "transition manager" for something as basic as switching from one equity manager to another? 

 

Even for larger institutions (say, $1B+ in portfolio size), managing the impacts associated with such a transition--liquidating with minimal influence on price / execution--usually requires capable planning, not hiring another hedging expert with an ETF strategy. 

 

The above is a classic example of middle-man-itis, in that here is a service provider inserting another consultant to manage a process that should and can be handled by existing staff. 

 

There are unavoidably complex issues (often political) faced by institutional investors: Something like switching equity fund managers is NOT one of them. A move to simplicity and efficiency within institutional investor consulting would go a long way. And, it might even lower fees, and improve returns for clients, to boot. 

 

This has been the first installment of my new series, "The Death of Investing." Please join me next time as we examine another common asinine investing practice: "Intellectual Rigor mortis. Or, Missing bull markets by sheer indecision." Thank-you.

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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