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Key Messages

Wall Street, Forest Land Loss and Large-Scale Forest Conservation in the Upper Great Lakes Tom Duffus, The Nature Conservancy, NE Minnesota Program. Key Messages. Forests and waters of the Upper Great Lakes are threatened by the fragmentation and loss of habitat as never before

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Key Messages

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  1. Wall Street, Forest Land Loss and Large-Scale Forest Conservation in the Upper Great LakesTom Duffus, The Nature Conservancy, NE Minnesota Program

  2. Key Messages • Forests and waters of the Upper Great Lakes are threatened by the fragmentation and loss of habitat as never before • Stock price competitiveness is driving forest land divestiture • Increases in available private lands to feed voracious second home markets threatens timber supplies and resource protection • Public lands alone are not enough to provide timber supplies and protection of forest-related resources • Larger, private lands offer significant resource protectionopportunities • Large-scale private forest conservation projects offer efficiency and leverage – a big bang for the buck • Industrial and Non-industrial private forests are not truly “sustainable” unless protected

  3. Outline • Trends in forest loss and fragmentation • Drivers behind this • Status of private industry lands in the US • Forest Conservation - Opportunities and examples of large-scale forest conservation projects

  4. What is Happening? Recent shifts in forest ownership • Population growth and expansion • Dramatic increases in second home market and land prices, low interest rates, bad stock market, etc. • in Minnesota, alone: • New seasonal homes (25% increase 1990-2000) • New residences (25% increase 1990-2000) • 12-25% annual increase in value 2000-present The effects of Wall Street and world markets on the forest products industry and its lands…

  5. Timberland Sales, To Owner Category Timberland Timberland Net Change (mm acres, 1999-2001) Holdings Holdings Forest Timberland Conservation (mm acres, 1998) (mm acres, 2002) Industry Investors Interests Forest Industry 55.8 49.9 -10.6% 2 5.3 0.6 Timberland Investors 16.6 21.8 31.3% 0 1.1 0.2 Conservation Interests 0.3 1.0 233.3% 0 0.1 0.2 source: HTRG and TNC What is Happening? Recent shifts in forest ownership @ Timberland investor category includes private equity investors and publicly traded timber-focused forest products companies (REIT’s) (mm acres) @

  6. New Forest Owners TIMO cycle • 1980s to mid 1990s • Assets bought based on timber value • Pitched to investors as 6-8% return • Gains averaged 13.4% annually • Mid 90s to 2000 • Huge influx of capital– from $6 billion to $10 billion • 6-8 million acres from industry to TIMOs • Shift in asset from timber to real estate • 2000 to present • TIMOs start to divest TIMO = “Timber Investment Management Organization”

  7. Timber LandMarket Analysis TIMO’s Industry

  8. Why a Shift in Ownership? • Wall Street demanding better deployment of capital -undervalued land asset be converted to higher-yielding asset (example: Boise Cascade bought Office Max, sold land to pay cost) …and also… • Some companies selling land to show profits during slumps in paper market • Capturing appreciation of land…second home and “rural residential” markets • Lands no longer “strategic reserves” • New predictions for a “wall of wood” • Lands now run as a business (real estate and timber, like TIMO’s) to capture “highest & best use”

  9. Why a Shift in Ownership?TIMO’s a More Efficient Investment • TIMO’s have lower cost of capital (lower debt-to equity ratio = lower risk for lenders) • TIMO’s (limited partnerships) have more favorable single tax structure vs. double tax of industry “C-corps” • These lower costs for TIMO’s translate to higher returns from profits as compared to industry • Wall Street analysts “demanding” better returns from land capital than industry can provide • TIMO’s taking advantage of this opportunity

  10. Example “Boise Cascade Corp. announced … the sale of approximately 79,000 acres of timberland in western Louisiana for approximately $84 million to the Hancock Timber Resource Group based in Boston, Mass. … The sale of the timberland is one of the first sales announced since the company's purchase of OfficeMax in December. Company leaders say they're now evaluating “strategic alternatives” for the company's paper and timber assets that could result in further sales. The money from this sale and future sales will go toward paying down the $2.3 billion in debt Boise Cascade incurred from the OfficeMax purchase.” Edition Date: 03-20-2004 Idaho Statesman, excerpts UPDATE: Boise now ceases to exist – all timber/mill assets sold to an investor presumably to pay down Office Max purchase

  11. Land Loss Trends • In 2003, International Paper sold over 1 million acres to 800 individuals… • In 2004, Meade Westvaco…sold all land in Maine, more anticipated • Weyerhaeuser just sold another 750,000 acres in Georgia, North and South Carolina. • Stora Enso sold all its land in Sweden within the past year.

  12. Land Loss Trends • In Minnesota… • All timberlands owned by Louisiana Pacific sold in 1998 to a TIMO. (TNC bought 10,000 ac.) • All timberlands owned by Consolidated Paper sold in 2000-2003 to Stora Enso to Plum Creek to TIMO • 2004 • UPM/Blandin Paper changed accounting practices; full values reported makes lands vulnerable to Wall Street pressure • Boise…ceased to exist; all lands to an investor (Madison Dearborn): “expected to sell off all or most of the lands in 2005…to reduce new debt load” (Timberland Markets/August 2004) • Potlatch…becoming a TIMO/REIT. Sold all its mills.

  13. What Happens to the Land? • Fragmentation of forests - • particularly at exit time for timberland investment outfits • Short term management decisions of TIMO and post-TIMO owners • Liquidation cutting • Subdivision and development • …for starters…

  14. What is the Threat to Forests and Rural Communities? • Subdividing larger forest ownerships…brings: • fragmented forests and destroyed habitat from new roads and houses • lost opportunities for sustainable forest management • loss of forest cover, impacts on sensitive areas and water resources • Impacts on state and local forest economy and related jobs • Loss of community character and quality of life Large blocks of forest offer significant resource protection and compliment public lands

  15. Options for Forest Industry Land • Hold the Land • Secures % of supply • Not favorable to Wall Street – capital under-employed • Sell the Land • Liberate capital, funds diversification, satisfies Wall Street • Betting on future supplies • Lands sold to a TIMO with an unknown future… • Partially Monetize the Land – sell conservation easement • No impact on timber supplies or returns • Satisfies Wall Street by liberating non-timber capital • A “green” approach that supports certification efforts • Land remains marketable • Maintain influence on public and private forestry issues

  16. Role of Conservation Traditional Land Conservation Approaches: • add to the protected land base of parks, etc.: • Buy land for public or private conservation • Gifts of conservation easements Small-scale activity

  17. Stretching charitable and public dollars:scale matters X X

  18. Role of Conservation - Example “A Deal Is Reached to Preserve Land and the Economy in the Adirondacks” April, 2004 International Paper just announced a conservation easement and land sale agreement covering 257,000 acres… "This shows an evolution of the orientation of the forest products industry toward capturing all the multiple values of managing forests rather than focusing just on the production of fiber,"Tom Jorling, VP for Environmental Affairs at International Paper.

  19. In last 3 years… Bigger is Possible: TNC andForest Land Conservation • 37 major projects in US protecting 1.65 m acres and 5 projects in other countries protecting 1.7 m acres. Total 3.3 m acres • $345 m dollars raised with private and government partners for US projects and $40 m for international projects • Strong support from our members and partners to do more

  20. Recent Transactions:Partnerships, Scale and Easements • Maine (Great No. Paper):refinanced $50 million debt • 40,000 acres fee to conservation (TNC) • 200,000 acres working forest conservation easement (TNC) • Northern New Hampshire: 171,000 acres • 25,000 acres fee to conservation (State and TNC) • 146,000 acres working forest conservation easement (State) • Partnership: State, TNC, TPL, Forest Society of NH • Tug Hill, NY 48,000 acres • 13,000 acres fee to conservation (TNC) • 35,000 acres working forest conservation easement (State) • Upper Peninsula, Michigan 262,000 acres • working forest conservation easement and fee (State, TNC)

  21. Conservation Easements Integrated land Best owner Buy Land Timber cash flow Timber/Industry investors/owners Components Conservation values NGOs, Public Development Working forest easements allow us to protect lands and waters from unsustainable uses at a lower cost than buying and managing land

  22. What is a Conservation Easement ? • A legal agreement between a landowner and a qualified charity or unit of government that permanently restricts the use of land • …to protect “public values” in the land - scenic, recreation, water, habitats, open space, etc. • …and protect productive capacity of land (ag. & forest) • …by eliminating destructive land uses • Conveys right to enforce restrictions • public recreation rights sometimes conveyed

  23. What is a Conservation Easement ? • Holder of easement monitors compliance • Land remains privately owned and on tax rolls • “Working Forest Conservation Easements” (WFCE’s) put sidebars on forestry – eliminate “bad forestry” and codify sustainable practices • WFCE’s can advance public conservation goals without public ownership • Win-Win: WFCE’s serve public’s interest in conservation as well as economic security and community needs

  24. Funding Sources for Forest Conservation Transactions • = federal program for working forest conservation easements (grants to states up to75% of cost - but rarely that much) • States - bonding, dedicated sources (many states develop dedicated funding for WFCE’s) • Private sources - (foundations & donors in partnership with The Nature Conservancy, etc.) • Landowner (match) - “bargain sale” (on top of commitment to severely restrict their asset…) Typically, state and private sources drive Legacy

  25. Values Protected Traditional Wildlife Riparian Scenic Recreational Cultural

  26. Forest Legacy Program Funding History *Requires using $7,000,000 in prior year funds

  27. Forest Legacy Program Accomplishments As of April 30, 2004

  28. Participating States

  29. Questions?

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