Inventory Folks are from Mars and Acquisition / Divestiture are from Venus What Do Inventory Processes and Estimates have to do with Timberland Transactions Mike Clutter Vice President of North American Operations and Investments

1 Rules of Engagement First, Thanks to Reggie Fay, Dave Walters and Donald Gagliasso for inviting me to speak today. The concepts, analyses, and perspectives presented in this talk are mine alone and do not in any way represent the view of Forest Investment Associates I have had the opportunity to work in and manage groups that have had acquisition and divestiture responsibilities at Union Camp, Georgia-Pacific, and The Timber Company. All of this involved various responsibilities with valuation models and analyses Also, our collective objective is to have some fun... Some of my best friends and colleagues are A / D folks - -really!

2 Why Mars and Venus... 2 Men are from Mars and Women are from Venus by John Gray. A book about the difference in the way men and women communicate. Has sold over 50 million copies Mars – Fourth planet from our sun. Red, dry, cold and inhospitable Venus – second planet from our sun. Known in Roman mythology as the goddess of love and fertility

3 Acquisition and Divestiture in the Forest Products World With the disintegration of the vertically integrated forest products companies over the past 25 years A and D activity has been at all time high in our industry. Fixed length investment funds, public timber REITS focused on cash generation and remnant firms exiting the sector have all contributed to this increased A and D activity. It’s a fun, high pressure, fast moving activity and involves professionals from forestry, finance, investment banking... And lots of attorneys who make most of the money. Obviously, if you are trying to buy / sell timberland properties then inventories and future wood flows and cash flows are an important part of the puzzle. Things have definitely changed over the years with respect to the amount of information provided that analysts can use in their estimation of value 3

4 Acquisition and Divestiture in the Forest Products World There are two primary questions at the core of timberland acquisition and divestiture analysis 1. What will the property transact for in the marketplace 2. What is the property “worth” to my firm (or me) given the optimal management plan that has been assembled for the property These are very different questions and are generally addressed by different groups in most timberland organizations The real objective of an A and D group is to try identify properties where these two values are as far apart as possible – the farther apart they are the better the investment return 4

5 So this Mars and Venus Thing... Generally the individuals that negotiate these deals are the same folks that gauge market price. They are charged with sitting down at the negotiating table and striking the best deal they think can be had... Kind of like buying a car Whereas those individuals that have developed that other number – an optimal forest plan have spent most of their time locked in a room staring at computer screens and asking question about inventory data quality and uncertainty... About almost everything – silviculture costs, timber prices and revenues, possible HBU sales, appropriate discount rates, and inventory estimates... So these two groups have different perspectives on this process... 5

6 And This is How it All Started... 6

7 Things that make you go Hmmmmmmm... Much of my career has been spent working back and forth between these two groups in an effort to better inform both (hopefully) during the process. The discussions generally go something like this... 7

8 Things are even more interesting today Seller provides: 1. stand-level inventory and silviculture history (but little or no documentation on this process) 2. A strata-level inventory conducted for the sales process (plot data and locations, estimates of means, totals, etc.) A potential purchaser will probably also execute a strata-level inventory to “check” the seller’s estimates... And guess what, they aren’t the “same”. So what happens? The seller has its estimate and the potential purchaser has its estimate. I find this to be a fascinating estimation problem with a number of possible approaches 1. A traditional precision weighted estimator 2. A Bayesian approach using the sellers data as the prior 3. Combining the two strata-level cruises into one cruise 8

9 What Should we Suggest? As designers of inventories, we should strive to provide as much information as possible to the A and D process We should try to suggest rational ways to adjust sales prices in the purchase and sales agreements when significant differences exist We should pursue some theoretical work on how to best combine estimates from multiple inventories. We re not short on data in most instances We should always remember our Venus counterparts and suggest ways to address these differences on the front-end of an A and D opportunity – not the back-end. 9

10 Questions ??

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