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CalPERS Consultant Defends Forestland Sale

From www.ai-cio.com - August 20, 2018 12:30 PM

A key consultant for the California Public Employees’ Retirement System (CalPERS) has defended the system selling most of its forestland portfolio at a loss estimated to be around $500 million, saying CalPERS assets are better invested in core real estate.

Forestland, real estate, and infrastructure make up the three components of the CalPERS $37.5 billion real assets program, but unlike returns for real estate and infrastructure over the last few years, forestland investments have been a money loser for the system.

Andrew Junkin, president of Wilshire Consulting, who serves as the pension system’s general and forestland consultant, told the CalPERS Investment Committee on August 14 that the recent sale of almost 80% of CalPERS’s $2 billion forestland portfolio was not “a panicked move.”

“I think your [investment] staff spent a lot of time really thinking through the options and finding the best possible solution at this time,” he said. CalPERS sold the portfolio on an unclosed date after the end of the second quarter on June 30.

Junkin said the sale of the forestland portfolio came just before CalPERS would have had to make “a very large principal payment.” He said there had been a recent evaluation of the forestland portfolio’s value, resulting in a markdown. Junkin said even with the markdown, CalPERS officials received a higher price for the sale of the portfolio than the price listed in its valuation report.

Junkin said CalPERS would have had to mark down the portfolio, even if it did not sell the land, based on the evaluation.

CalPERS officials have not disclosed the sale price of the southeastern US timber portfolio or markdown information, but the portfolio was listed as being worth $1.559 billion as of June 30. That number reflects previous markdowns.

CalPERS had paid around $2 billion for the portfolio starting back in 2008, part of then Chief Investment Officer Russell Reed’s plan to help diversity the system’s assets. CalPERS, with more than $352 billion in assets under management, is the largest retirement plan in the US.

CalPERS sources say the pension system lost around $500 million from the sale.

Junkin told the investment committee that the forestland portfolio struggled because of its heavy concentration in the southeast timber market. “Timber prices in the southeast were hit pretty hard in the global financial crisis because that tends to be the market that’s used for home construction,” he said. Junkin said even as home construction recovered, timber prices remained depressed. He said CalPERS’s timing was “poor,” buying the forestland before financial crash, but that “you can’t know in advance that the market’s going to collapse.”

The forestland portfolio was also heavily leveraged, acknowledged Junkin. He has previously said that CalPERS had to harvest trees to pay the debt service on the forestland portfolio. CalPERS officials have not disclosed the level of leverage in the portfolio.

CalPERS data shows that the overall forestland portfolio had a 1.92% return for the one-year period ending June 30, 187 basis points below CalPERS’s forestland benchmark. For the three-year period, the portfolio had a loss of 2.37%, 581 basis points below the benchmark, and for the five-year period, it had a loss of 0.99%, 709 basis points below the benchmark. For the 10-year period, the portfolio saw loss of 1.07%, 513 basis points below the benchmark.

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Molpus Woodlands Group acquires 192,000 acres of timberland in Louisiana

From www.forestbusinessnetwork.com - November 11, 2015 6:07 PM

The Molpus Woodlands Group, LLC (Molpus), a timberland investment management organization headquartered in Jackson, Mississippi, announced today, on behalf of a client, the successful purchase of approximately 192,000 acres of timberland and a timber lease in southwest Louisiana.

The timberland, located in six counties between the cities of Lake Charles, Louisiana to the south and Alexandria, Louisiana to the north, is a primarily southern pine plantation property that has been in timber production for decades. The timberland is located in a vibrant sawtimber and pulpwood market area and it provides raw material to forest products customers in a variety of domestic market segments. Molpus currently maintains offices in Bossier City, DeRidder and Monroe, Louisiana to oversee the management of an additional 207,000 acres in this state.

Prentiss & Carlisle's insight:

This appears to be the CalPERS holdings managed by Campbell Global.

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CalPERS Loses Over $500 Million on Botched Timber Investment; May Have Sold at Bottom of Market

From www.nakedcapitalism.com - August 6, 2018 11:54 AM

The Financial Times reports that CalPERS lost over $400 million on Lincoln Timber, a failed 2008 purchase of $2.38 billion of timberland in the southern part of the US. CalPERS exited the remainder of this investment in June, for $1.39 billion, a loss of $355 million on the purchase price. Combined with losses on disposals of previous portions of this holding, the total loss was over $500 million.

From the Financial Times:

Combined with previous disposals, it appears that total sales of the forestry land netted $1.85bn, leaving Calpers and its partners with a $534m loss before taking into account lumber revenues, inflation, management fees and debt servicing costs.

The article later states that the giant fund paid $52 million in fees. And of course, there were opportunity costs. Again from the pink paper:

According to Calpers documents, its return on the investment was a negative 0.5 per cent over 10 years, underperforming its benchmark, the NCREIF Timberland Index, by 497 basis points over that time.

“Leverage has exacerbated cash flow issues,” said a Calpers external audit last year. “Assets that would otherwise have been allowed to grow and appreciate, have been harvested to manage the debt.”

It also appears that CalPERS, as it is sometimes wont to do, timed its sale badly. The Financial Times points out CalPERS was in haste to exit its holdings:

After starting 2018 with the seventh-largest holdings of forestry land on the continent, the Texas sale all but takes Calpers out of the asset class.

“They made a decision to get out and they wanted to get out fast,” said Brooks Mendell of Forisk Consulting. “They’ve basically accomplished that objective.

***

In the 1990s, CalPERS had been an early entrant into timberland investing, along with Harvard, and had done well with this investment strategy. JJ Jelincic said the Lincoln investment was intended to be the first of a new program, but that a timber portfolio with holdings only in the South, and nothing in the Pacific Northwest, “made no sense”.

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Calpers Puts Portion of Timber Holdings Up for Sale

From www.wsj.com - May 15, 2015 2:51 PM

The California Public Employees’ Retirement System, or Calpers, is seeking buyers for roughly 300,000 acres of forestry largely in Louisiana amid a broader review of its timber holdings, according to people familiar with the matter. The woodland represents about one-fifth of roughly 1.3 million U.S. acres controlled by the Sacramento-based fund.

***
A decision to sell the Louisiana assets follows an announcement last September that Calpers would exit from a $4 billion investment in hedge funds due to concerns about complexity, costs and whether the commitment was large enough to affect overall returns.

“We continue to look through the entire portfolio to make sure that all programs fit with our current strategic priorities and our efforts to reduce costs and complexity,” a Calpers spokesman said. He added “no decisions have been made,” and there is no deadline for completion of the pension fund’s internal review of forestry holdings.

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.
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Calpers’s first investments in timber happened in the mid-1980s, but much of its $2.3 billion in forests was purchased when land prices were still high before the last housing bust. Since the financial crisis, timber has been Calpers’s weakest-performing asset, according to a May filing. Forestlands lost 0.4% over the past five years, while Calpers’s overall fund rose 9.4%.
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Calpers has an additional one million acres in east Texas it may consider selling if the Louisiana sale goes well, one of the people said. Those Louisiana assets could fetch several hundred million dollars, the people said. One of Calpers’s external timber managers, Campbell Group LLC of Portland, Ore., has hired UBS AG to run the sale.

The size of Calpers’s timber holdings is another reason the portfolio is under review. It represents only about 1% of total assets at Calpers, and Mr. Junkin added in his letter to Mr. Jones that “it could be argued” the allocation “is not large enough to have a significant impact” on overall returns.

Nearly 80% of Calpers’s timber holdings are in the U.S., with the rest in Latin America and the Asia Pacific area. One option under consideration for the U.S. timber portfolio is to leave it completely, but there are no immediate plans to sell any portion of the international forestry assets in Latin America and the Asia-Pacific region, according to people familiar with the matter.

Prentiss & Carlisle's insight:

See Jack Bridge's frank comments at "Risk-Adjusted Returns" http://sco.lt/5dvwmn

What the article doesn't say: the market for large timberland properties is pretty frothy right now, so what better time to sell? As Jack Lutz notes, this will easily be absorbed by the full-of-dry-powder TIMO's, although some may need buying partners if this is offered as a single transaction.

The timber REIT's have been buying back shares because they represent the cheapest timberland they can find. We'll see what they think of this opportunity...

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