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Not for distribution SUSTAINABLE FORESTRY INVESTMENT Cary Wingfield Raditz, CFA
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Not for distribution 07-Jun-07Cary Wingfield Raditz, CFA p2p2 Total Global Forestry Investment Total investable and leasable global forestlands estimated > 870 million ha Value > US$480 billion Forestry investment growing 20% p.a. for 20 years US$35 billion invested mainly in US US$20 billion held by institutional investors
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Not for distribution 07-Jun-07Cary Wingfield Raditz, CFA p3p3 Timber: the Investment Class Predictable biological growth Asset growth= forest growth Inventory=stored on the stump Strong historical returns Moderate risk High returns on risk* Portfolio diversification characteristics * Sharpe ratio
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Not for distribution 07-Jun-07Cary Wingfield Raditz, CFA p4p4 Returns & Risk 1973-2002 Asset ClassReturnsRisk*Sharpe ratio Timberland14.54%14.80%53.79% Small Cap Equities14.20%22.37%34.06% S&P 50010.66%17.99%22.68% Commercial Real Estate9.53%5.70%51.75% International Equities9.35%22.24%12.46% Long term Corporate Bonds9.28%11.52%23.44% US Treasury Bills6.58%2.73%0.00% *Sharpe ratio = (asset return–return on risk free asset) / risk [standard deviation]
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Not for distribution 07-Jun-07Cary Wingfield Raditz, CFA p5p5 Attributes of Return Biological tree growth Timber price changes Changes in the value of the underlying land asset Non-timber forest products and services—ancillary cash flows
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Not for distribution 07-Jun-07Cary Wingfield Raditz, CFA p6p6 Timber Reduces Portfolio Risk
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Not for distribution 07-Jun-07Cary Wingfield Raditz, CFA p7p7 Investment Suitability of Timber > 10 years = illiquid Long-term institutional portfolios Endowments, foundations, pension funds, insurance companies, high-net worth Matches maturity of longterm assets to maturity of longterm liabilities Low correlation to equities and fixed income provides diversification Certified forestland suitable for socially responsible investors
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Not for distribution 07-Jun-07Cary Wingfield Raditz, CFA p8p8 Investment Vehicles Purchase forestland—manage timber assets Forestry product equities Forestry product bonds REITS—real estate investment trusts TIMOS—Timber Investment Management Organizations Private equity partnerships
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Not for distribution 07-Jun-07Cary Wingfield Raditz, CFA p9p9 Environmental Issues Climate change Soil and freshwater conservation Loss of biodiversity Forest systems play a critical role in managing environmental problems
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Not for distribution 07-Jun-07Cary Wingfield Raditz, CFA p10 Forestland Management Methods Clear cutting (controversial) Pure conservation—tax deductible gifts of forestland Sustainable forestry management—”pure play” Forestry operations includes processing Certified forests (FSC)—biodiversity Non-timber forest products (NTFPs) Capturing PES cash flows--e.g., CERs Structured methods—e.g. easements
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Not for distribution 07-Jun-07Cary Wingfield Raditz, CFA p11 Tropical Forestry Investments Fast growing in tropics (short rotation) High discount for Emerging Markets risk Controversial (Equator Principles) Lessons learned: Mitigate country risk (management, rigorous internal controls, portfolio diversification) :Factor costs of poor infrastructural :Neutralize corruption risk :Coop local community participation in forest management :Certify forests :Manage non-timber forest products :Monitize tradable carbon emissions rights (CERs)
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Not for distribution 07-Jun-07Cary Wingfield Raditz, CFA p12 Payments for Eco-services Carbon sequestration--CERs Water use rights—local (New York City) Biodiversity—FSC certified (Precious Woods) Eco-tourism (Texas Inland—hunting rights) Conservation easements (USA e.g., Forest Legacy Trust) Tradable development rights (USA locally regulated)
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Not for distribution 07-Jun-07Cary Wingfield Raditz, CFA p13 Implications for Investment Valuation Value = Σ of discounted future cashflows NTFPs and PES are real options When exercised: PES provide ancillary cash flows “Value enhancements” Reduce illiquidity in afforestation PES converge private good and public good agenda
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Not for distribution 07-Jun-07Cary Wingfield Raditz, CFA p14 Timber Conservation Strategies 1. Pure Conservation 2. Sustainable Harvesting 3. Creative Structured Solutions 4. Example: Selling Easements
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Not for distribution 07-Jun-07Cary Wingfield Raditz, CFA p15 1.Pure Conservation No return of principal or income Forestland gift is tax deductible Appropriate for land having special value or unsuitable for logging Example: green belts near urban centers, old-growth riparian forests
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Not for distribution 07-Jun-07Cary Wingfield Raditz, CFA p16 2.Sustainable Harvesting Land harvested sustainably (< 6% of board ft/year) Sub-optimal timber returns, but is still solid investment Short-term positive impact on environment Either requires very long investment horizon or sale of most of land to capture principal and return on capital
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Not for distribution 07-Jun-07Cary Wingfield Raditz, CFA p17 3.Structured Solutions Incorporate PES Tax sensitive strategies--Easements Partner with non-profit govt and NGOs (Sierra Club) Structure for socially responsible investment market
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Not for distribution 07-Jun-07Cary Wingfield Raditz, CFA p18 Selling Easements Conservation easements Development easements Optimal or near optimal investment returns Fair short term/Good long term environmental impact Requires foundation and non-profit funds
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Not for distribution 07-Jun-07Cary Wingfield Raditz, CFA p19 Easement Return and Impact Benefits: Conserve wildlife habitat, clean watersheds, prevent urban sprawl, preserve valuable forestland Purchase land with merchantable timber Agree to environmental easement on the property at beginning Satisfy the environmental guideline test Provide investors tax-deductible contributions Through careful replanting, return the ecosystem to its natural pre-logging state At end of term, put the land into permanent conservation through a land trust
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Not for distribution 07-Jun-07Cary Wingfield Raditz, CFA p20 Is it Time to Invest? Opportunities for creative, sustainable solutions New SRI listings in capital markets Select opportunities in emerging markets Environment awareness will increase value of certified wood New international protocols will increase demand and price of carbon and other PES
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Not for distribution 07-Jun-07Cary Wingfield Raditz, CFA p21 Sources of Information www.forest-trends.org www.forest-trends.org Private placement memorandum Initial public offering prospectus Hancock Timber Resource Group www.hnrg.com www.hnrg.com Rights and Resources www.rightsandresources.org www.rightsandresources.org
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