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Curated by Sam Radcliffe
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Deltic Timber In The Crosshairs?

Deltic Timber In The Crosshairs? | Timberland Investment | Scoop.it
On February 22, 2017, Southeastern Asset Management, which owns a 15% stake in Deltic Timber Corporation (NYSE:DEL), filed a 13D with the Securities and Exchange Commission. In it, Southeastern stated that it, and Deltic, had been approached by multiple parties interested in merging or acquiring Deltic. It also stated that Deltic had hired a financial adviser but refuses to enter into substantive negotiations with these parties. They go on to state that the interested parties are willing to pay a price for the company in excess of current trading levels.

On February 22, DEL closed at $77.68, and the very next day, it went to $82.28. It has recently fallen back to $75.29. The stock's 52-week high and low are $85.42 and $53.21, respectively. Deltic pays a dividend of $.40, about 0.53%, well below what other timber RIETs and MLPs pay.

Deltic Timber Corporation is a C corporation based in El Dorado, Arkansas. It owns 530,000 acres of timberland in Arkansas and Louisiana. It also owns two sawmills and an MDF mill. Last year, Deltic produced 274 MMBF of lumber and 104 MMSF of MDF. Total sales for the company in 2016 were $219.4 million. About 16% of sales came from Woodlands, 74% from Manufacturing, and about 10% from Real Estate. Operating income for the three segments in 2016 was $44.6 million: 40% from Woodlands, 43% from Manufacturing, and 17% from Real Estate. G&A is a whopping $22.9 million. Net Income, a meaningless figure for a timber company, was $9,245 million. Cash from operations, a much better number, was $43,593 million.

Who could be interested in acquiring Deltic? My best guess is Weyerhaeuser (NYSE:WY) and/or Potlatch Corp. (NASDAQ:PCH). Both REITs have operations intermingled with Deltic's, and they also own large manufacturing operations. It could also be one of the many TIMOs; however, because of Deltic's manufacturing assets, my bet is one of the REITs.

Lets take a quick and dirty look at a valuation of Deltic's assets:

503,500 acres of Timberland at $2,000/acre - $1,007,000,000

26,500 acres of HBU at $7,500/acre - $132,500,000

3 mills at $75 million each - $225,000000

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Total - $1,139,500,000

Debt - ($240,839,000)

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Net - $1,123,661,000

$92.43 per share
Sam Radcliffe's insight:

This is the opinion of Tom Kametz who writes about the timber industry for Seeking Alpha.

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Plum Creek Timber Biding Its Time - Analyst Opinion

Plum Creek Timber Biding Its Time - Analyst Opinion | Timberland Investment | Scoop.it

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When Plum Creek reported earnings in late July, the results largely reflected the overall lackluster trends in the housing, timber, and lumber markets. Revenue declined 15% from the prior year, with timber and manufacturing revenue down slightly and the volatile real estate business down quite a lot.


In the timber business, Plum Creek continues to seek to preserve long-term value by limiting its harvest levels at current prices. Northern volume was down 1% on a double-digit decline in sawlogs, as sawlog pricing fell about 5%. Pulp pricing was stronger and the company did meaningfully increase its volume in the quarter. The experience in the Southern business was broadly the same - management reduced sawlog production in response to weak pricing and increased pulpwood production in response to higher prices.


The 68% decline in real estate revenue was driven largely by a much lower level of land transactions. Plum Creek sold just over 16,000 acres in the second quarter, down from 67,000 acres in the year-ago period and 131,000 acres in the prior quarter. Land sales are "consistently inconsistent", and I wouldn't read much into the quarterly volatility. I'd also note that pricing was generally better than in the year-ago period for similar acreage types and the HBU/recreational land sales were at average prices about 5% higher than my assumptions in my NAV model.
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Very little has changed with respect to my long-term valuation assumptions. I continue to believe that Plum Creek's long-term net asset value is around $47/share (assuming an overall timberland value of $1,500/acre; with more than half of the acreage worth around $1,800 to $1,850/acre). Recent private market transactions have remained above the long-term per-acre values I estimate for Plum Creek, and the central pillar of my bullish thesis on Plum Creek remains that the public markets value the company's timberland less than "professional" buyers have been shown to be willing to pay for broadly similar assets.

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BMO urges Grief to liquidate timberlands

Sam Radcliffe's insight:

Mark Wilde values the ~250,000 acres of Grief timberland at ~$1,800 per acre.

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Timberrrr!! Ninth Circuit Chops Down the Tax Court in Estate of Giustina

Timberrrr!! Ninth Circuit Chops Down the Tax Court in Estate of Giustina | Timberland Investment | Scoop.it
In the recent unpublished opinion of Estate of Giustina v. Commissioner,1  the Ninth Circuit reversed a Tax Court opinion dealing with the valuation of a 41.128% limited partnership interest.  The partnership was in the timber business.  As with just about all valuation cases involving a going concern business, the Tax Court looked to different methods of valuation, as well as the different discounts that may be applicable.

In general, the Ninth Circuit held that the Tax Court did not commit reversible error with respect to the various discounts.2  The main issue that the Ninth Circuit reversed and remanded dealt with the Tax Court’s assigning a weighted average to two different valuation methodologies in coming up with its final valuation.3

The Cashflow Method is basically the value of the partnership as a going-concern and assumes that the heirs would continue to operate the partnership as a timber business.  The Asset Method assumes that the heirs would sell all the timberland assets of partnership and distribute the proceeds to the partners.

The Tax Court determined that the value of the partnership using the Cashflow Method was $51.7 million and the value using the Asset Method was $150.7 million.  Rather than pick one of the methodologies as an appropriate value, the Tax Court looked at the “odds” that the heirs would continue to own the partnership as a going concern versus the “odds” that the heirs would agree to sell the timberland assets and distribute the proceeds.

The Tax Court then detailed the difficulty the heirs who wished to liquidate the partnership would have to achieve that result.4  As explained by the Ninth Circuit:

In order for liquidation to occur, we must assume that (1) a hypothetical buyer would somehow obtain admission as a limited partner from the general partners, who have repeatedly emphasized the importance that they place upon continued operation of the partnership; (2) the buyer would then turn around and seek dissolution of the partnership or removal of the general partners who just approved his admission to the partnership; and (3) the buyer would manage to convince at least two (or possibly more) other limited partners to go along, despite the fact that "no limited partner ever asked or ever discussed the sale of an interest." Alternatively, we must assume that the existing limited partners, or their heirs or assigns, owning two-thirds of the partnership, would seek dissolution.

As a result of the difficulty the heirs would have to dissolve the partnership, the Tax Court concluded that there was a 25% likelihood of liquidation of the partnership.  It therefore assigned a 25% weight to the Asset Method valuation and a 75% weight to the valuation of the partnership as a going concern (i.e., the Cashflow Method).  This resulted in an overall value $76,447,143 ((75% x $51,702,857) + (25% x $150,680,000)).

In a very brief opinion, the Ninth Circuit rejected this methodology.  It seems as though the Ninth Circuit did not necessarily have problem with the Tax Court using a weighted average approach, although it is not clear.  As the quote above states, the Ninth Circuit noted the overall difficulty the heirs would have in forming a 2/3rds voting bloc that would be necessary to vote to dissolve. Quoting Estate of Simplot v. Commissioner,5 the Ninth Circuit stated “the Tax Court engaged in ‘imaginary scenarios as to who a purchaser might be, how long the purchaser would be willing to wait without any return on his investment, and what combinations the purchaser might be able to effect.”
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The St. Joe Company: Special Situation With Potential Significant Capital Return

The St. Joe Company: Special Situation With Potential Significant Capital Return | Timberland Investment | Scoop.it

St. Joe is a company you probably have not heard of, unless you spend time following the epic battles of high profile fund managers who take opposing stakes in companies and then wage public battles about who has taken the correct position.
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The bullish and bearish arguments both center around the valuation, both present and future, of the over 550K acres of land and real estate assets that St. Joe owned predominantly in the Panhandle of Northwest Florida.
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First, let's first consider the ~385K acre land sale to AgReserves of primarily non-core timberland. The bearish argument previously espoused has been that the bulk of the over 550K acres owned by St. Joe was only worth close to $1,500 per acre. Many bears might look at this land sale, and cry victory, considering the ~$560M sales price valued the land at about $1,475 per acre.


However, St. Joe has consistently stated that this land was a non-core holding. Spend just a few minutes looking at a map of Florida and you will see the bulk of this land is completely rural, and so far away from ever being developed, that it certainly is more valuable as timberland. I would argue that the bears should eat crow based on St. Joe having the foresight to complete this transaction.
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In FY 2013, St. Joe generated $9.6M in net income from timber sales related to the land sold to AgReserves. Instead of arguing what this land was worth, I think the market is overlooking the fact that St. Joe took an asset and sold it for almost 60x the earnings that asset generated in the prior year. When you assume that, after taxes, this asset sale will generate close to $500M in cash for St. Joe, the company would simply have to earn a return of 3% a year on this cash to generate 50% more earnings than the asset was previously generating as timberland.

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Oregon board OKs controversial forestland sale

Oregon board OKs controversial forestland sale | Timberland Investment | Scoop.it

Top state officials on Tuesday agreed to move forward with the sale of scattered tracts of the Elliott State Forest, despite objections from conservation groups that they include nesting trees for a protected bird.

Gov. John Kitzhaber, Secretary of State Kate Brown and State Treasurer Ted Wheeler — who make up the State Land Board — unanimously backed the plan.


They said they're not trying to privatize the forest but need to balance conservation concerns against a constitutional requirement that the land generate money for public schools.

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The Land Board is responsible for managing the Elliott, on the southern coast near Coos Bay, and other state forests to generate money for the Common School Fund, which supports public schools. Officials say the fund lost money in fiscal-year 2013 because litigation over habitat for the marbled murrelet, a threatened seabird, has all but halted timber sales.

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"If you sold it to the timber industry at a cut-rate price, Oregonians would lose the remarkable, rare wildlife habitat, recreational opportunities that can only persist on public lands," said Francis Eatherington, conservation director for Cascadia Wildlands.


Kitzhaber responded that the sale would help establish a fair market value for the land, which would open up more options for divesting land in the future. Without knowing the value of the land, he said, the state can't negotiate exclusively with conservation-focused buyers because it wouldn't be able to prove it earned the maximum return for the land.

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An appraiser hired by the state concluded the presence of marbled murrelets, discovered over the summer, would significantly decrease the value of the land up for sale, from an estimated $22.1 million to $3.6 million. Stands occupied by murrelets can't be logged, but the appraiser suggested a timber company might do so anyway, risking penalties to earn a high return.

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Millions at stake in Blandin, counties property tax debate

Millions at stake in Blandin, counties property tax debate | Timberland Investment | Scoop.it

A case currently working its way through tax court in Minnesota will determine the value of about 187,000 acres of forestland owned by Grand Rapids-based Blandin Paper Company. That determination, in turn, will be used to calculate property taxes for multiple parcels located in Itasca, Atikin, Koochiching and St. Louis counties.


The counties and the paper company are at odds over Blandin’s tax bill. The disputes date back to 2010 and pit one type of valuation methodology against another - with a difference in the millions.


Blandin Paper Co., owned by Finnish-based UPM, made numerous filings in 2010, 2011 and 2012, challenging its land values, according to information from the tax court and the Itasca County Attorney’s Office. Many of those individual filings have been consolidated for trial.

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Adding another dimension to the case is the fact that the lands in question were moved into a voluntary easement program in 2010. The deal, signed by the paper company and the Minnesota Department of Natural Resources, was negotiated in part by the Conservation Fund. The agreement put the Blandin lands into a permanent easement, preventing fragmentation, but remaining open to public recreational use and in use as working forestland for ongoing timber supply.

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According to court documents, both before and after appraisals were obtained as part of the easement negotiation process. The Sewell Appraisals, which are at the heart of the tax case, assessed the land value by analyzing its value as a single economic unit. The paper company contends that this single economic unit method should be used for its valuations. The counties, however, argue this single economic unit method is unlawful under Minnesota statute for calculating property taxes.

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Valuation differences using the two calculation methods are significant.


In 2010, the difference in Itasca County alone amounts to a $131 million reduction in valuation. That number jumps to $154 million in 2011 – due, according to Itasca County documents, from the lands moving into the conservation easement.


“For the 2011 assessment, Blandin continues to assert its ‘single economic unit’ methodology, and in addition asserts that the conservation easement they put on the property in 2010 further reduces its value. Their value conclusion for the Itasca parcels applying both assertions is $21,684,298 – an 88 percent reduction in value,” reads the report to the Northern Minnesota Land Use Planning Board.


The Itasca County assessor concludes that if Blandin is successful in tax court, the total tax loss to Itasca County would amount to $2.3 million for 2010 and 2011 as well as an additional loss of $1.2 million for 2012 taxes (payable 2013).

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Although the case won’t head to trail until later this year, the tax court denied a request from the counties to exclude the Sewell Appraisals from evidence. The counties had contended that the assessment methodology used is unlawful for the purpose of calculating property taxes. The four counties also requested summary judgment. Minnesota Tax Court denied both petitions.


Now, another round of legal assessment will be necessary to determine the lands’ value.


Itasca County Attorney Jack Muhar said the trial is scheduled for Sept. 23 to Oct. 4. 

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Land Value Depends on Where You Are Standing

Land Value Depends on Where You Are Standing | Timberland Investment | Scoop.it

So the story goes something like this… The young farm boy comes to his boss and asks, “So, what is old Mr. Henry’s farm worth?” The old farmer looks over at the young man, tips his hat back and says “well son, it all depends on whether you are buying or selling.”


The economics of this example translates easily in evaluating a land buyer’s willingness to pay for a given property. Not all land buyers share the same goals in terms of land use, return on investment or management. While this may seem readily obvious, it is often not well understood by practitioners in the industry; and these differences if identified can yield valuable indicators for determining land value that will be internalized in today’s land market. The “buyer values” I will outline are often captured in most appraisals, but it is understood that appraisals are a “snap shot in time” and do not often reflect the subtle motivations of buyers which drive them to make the purchase. Appraisals, just in the same way as this column, are a statement of opinion based on the best available information and analysis.

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BMO’s Timber & Wood Products Summit in Seattle:
Trip Notes  

BMO’s Timber & Wood Products Summit in Seattle:<br/>Trip Notes   | Timberland Investment | Scoop.it

Timberland values remain very strong and institutional appetite for timberland remains healthy. As a result, many observers have noted a "big property premium" in timberland transactions. Most participants suggested that discount rates remain in the 5.0-5.5% range. However, several also noted that reverse-engineered analysis on some recent deals implies discount rates of 4% or below. 2015 data on returns from NCREIF point to EBITDA returns in the 2.5-3.0% range across the entire U.S. Capital appreciation was strongest in the Northwest (+5.4%). To our eye, the biggest question mark – and, perhaps, the greatest risk – is the continued upward momentum in southern valuations. Capital appreciation is outpacing cashflow growth. Timberland investors continue to underwrite a strong rebound in southern sawlog pricing in their valuation assumptions. This "reversion to trend" analysis assumes that south-wide sawlog prices rebound from current levels in the mid-$20s per ton to approximately $40 per ton (a level last seen in 2005). After bottoming in the low-$20s/ton range during the recession and then rallying modestly to the mid-$20s, sawtimber prices have been going sideways.
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To be clear: we're not arguing that prices can't rebound sharply. But after a decade of sub-trend pricing, perhaps we need to reconsider the trendline.

Sam Radcliffe's insight:

Full report available at: http://goo.gl/h4CBSJ

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Judge: Timberland value plummets after conservation easement

Judge: Timberland value plummets after conservation easement | Timberland Investment | Scoop.it
More than 187,000 acres of forest in Minnesota fetches a lower price when you have to sell it all in one chunk.

That was the ruling this month of a Minnesota Tax Court judge who rejected the land appraisals from four Minnesota counties and delivered a victory to UPM Blandin, which owns the giant baby blue paper mill in Grand Rapids.

The judge ruled that Blandin’s forest — restricted by a conservation easement with the state — is worth about one-eighth the collective value quoted by the county’s assessors.

As a result, the tax base will decline in four counties; Itasca County, where most of the land is, will be hit hardest. The ruling also sets precedent for how swaths of forest in state conservation easements will be valued and taxed in the future.
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Latest Report from Forest Research Group

Sam Radcliffe's insight:

As usual, interesting stuff from Jack Lutz. His observations are essentially the rationale for price adjustments made in the comparable sales approach to valuation of timberlands.

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P&C Q2 Newsletter: Northeast market conditions and a report on carbon markets

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Timber Inventory Uncertainty: Impact on Property Valuation

Sam Radcliffe's insight:

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

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Jack D Bridges's curator insight, May 1, 2014 10:28 AM

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

 

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

 

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

 

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

 

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

 

JDB

 

Post-Script

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

 

http://www.prentissandcarlisle.com/

 

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

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Marbled murrelets discovered in Elliott State Forest, put land sale in doubt

Marbled murrelets discovered in Elliott State Forest, put land sale in doubt | Timberland Investment | Scoop.it

The discovery of threatened marbled murrelet seabirds has cast uncertainty over a plan to sell state-owned land in the Elliott State Forest in Coos County.


The protected seabird was spotted this summer by state surveyors and volunteers with Coast Range Forest Watch, a conservation group that opposes the sale.


Before the discovery, when logging wouldn't have been restricted, three tracts for sale in the forest were valued at $22.1 million. After the endangered species was found, the land's value dropped to $3.6 million, according to state appraisals. Stands occupied by murrelets can't be logged and are worth less.


Timber industry representatives told an appraiser working for the Department of State Lands that they were unlikely to aggressively pursue the land, because of the uncertainty arising from the bird.

Sam Radcliffe's insight:

A very tangible measure of the cost of the Endangered Species Act.

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IVSC Releases Exposure Draft on Valuation of Forests

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Jack D Bridges's curator insight, December 13, 2012 4:11 PM

This lot knows slightly more about timberland valuation than I do...great reading!