GROWING PROFITS

NEAR NAPLES, Idaho – Snow-covered stands of western larch in Idaho’s Selkirk Mountains represent one of the hottest new Wall Street investments: trees.

In a search for hard assets, institutional investors are buying up billions of dollars worth of private U.S. timberland. The trend is playing out on a steep hillside west of Naples, Idaho.

Once, this land was owned by Crown Pacific, a Portland firm that used the trees to feed its three North Idaho sawmills. But Crown Pacific filed for bankruptcy and sold off its 250,000 acres of timber holdings in the Panhandle three years ago.

The new owner is Forest Capital Partners, a Boston-based company that represents pension funds, wealthy families and other well-heeled investors. Forest Capital owns no sawmills. It sells logs to 30 different Inland Northwest customers, including a former Crown Pacific mill, other lumber producers, a newsprint plant, and log-home companies.

Purchases like Forest Capital’s represent an enormous shift in private forest land ownership. Burdened by debt, and squeezed by shareholders looking for higher profits, many integrated forest product companies are selling off vast tracts of fir, spruce, pine, cedar and hemlock once used to ensure cheap fiber supplies for paper plants and sawmills.

Louisiana-Pacific Corp. sold off nearly 1 million acres of land, and reinvested the money in manufacturing facilities. International Paper is mulling the possibility of putting some, or all, of its 6.8 million acres of timber holdings on the market. The unhitching of private forestland from production facilities is being watched carefully, and with some consternation.

“A number of stakeholders are very interested in this trend,” said Mike Clutter, a forest finance professor at the University of Georgia, who has been tracking changing ownership patterns.

Environmental groups worry about institutional investors over-cutting to shore up annual returns, or splintering off parcels to sell as lucrative cabin sites or rural ranchettes. Hikers and snowmobile enthusiasts wonder if they’ll have the same unfettered access to recreational use of the land that they enjoyed under corporate ownership.

On Forest Capital’s lands, little has changed since the sale, said Kevin Boling, general manager of the company’s Inland Northwest division.

On Tuesday, he chatted with Tom Foust, a Bonners Ferry logger overseeing harvesting operations. Foust’s company has cut trees on this particular piece of the Selkirks for the last four successive landowners. Nearby, forester Kennon McClintock discussed seeing grizzly bear tracks on the ridge during the summer, and noted that December is a less disruptive time for logging, because the bears are hibernating. He, too, is a veteran on this parcel. Forest Capital hired many of Crown Pacific’s foresters.

The public can still access Forest Capital’s lands. And the firm’s long-term strategy revolves around timber harvests, not real estate sales, Boling said. “We continue to meet an important need for logs in the local market.”

$10 billion chasing trees

Forest Capital is indicative of the new class of owners snapping up land. Founded by two foresters turned MBAs, Forest Capital bought its first forestland in North Idaho in 2002. Now, the firm owns more than 2 million acres of trees in six states.

“When we started the company … we knew that a large amount of forestland was coming up for sale,” said Matt Donegan, Forest Capital’s co-president. “The amount has exceeded our expectations.”

The firm’s acreage was cobbled together largely from the divestitures of three companies – Crown Pacific, Louisiana-Pacific and Boise Cascade. Earlier this year, Forest Capital bought 2.2 million acres from Boise Cascade for $1.6 billion – one of the largest timberland transactions in recent history.

In industry lingo, Forest Capital is a timber investment management organization – TIMO for short. TIMOs, still a relatively small pool, operate sort of like mutual funds. Buying in, however, is beyond the means of most individual investors. A stake in Forest Capital costs “well north of $10 million,” according to Donegan, though other TIMOS accept starting investments for as low as $250,000. In addition to TIMOS, pension funds, university endowments and other types of institutional investors are competing for forest land.

Donegan and the firm’s other co-president, Scott Jones, started their careers in the woods, eventually ending up at John Hancock Mutual Life Insurance Co. Jones helped set up the insurance company’s first timber fund for institutional investors. Donegan worked as a timberland portfolio manager.

According to Yale University’s Program on Private Forests, institutional investment in timberland has grown exponentially over the last 15 years – from $1 billion to more than $15 billion. Another $10 billion worth of investment money is chasing trees both in the United States and overseas.

Private forestland became a popular tool for rounding out portfolios after the stock market tanked in 2000. The attraction: investors generally get modest returns in exchange for modest risk.

Buying 1,000 acres of trees is simpler than buying an apartment complex, noted Tim Reinertsen, senior vice president for Realty Marketing/Northwest, a Portland firm that specializes in land sales. Investors do end up paying for things like fertilizer and pre-commercial thinning. But they don’t have to worry about replacing roofs, repairing busted pipes or evicting deadbeat tenants, Reinertsen said.

In addition, timberland’s performance doesn’t correlate with stock market swings. And if lumber prices sag, investors can hold off on logging their land until lumber prices rise again. Meanwhile, the trees continue to grow, increasing in value.

Timberland investors can expect annual returns in the 6 percent to 10 percent range, after inflation. Some analysts liken it to buying high quality corporate bonds or Treasury bills. Since trees can take 80 years to reach harvest age, however, timberland isn’t a short-term investment. Investors are usually locked in for at least a decade.

“It’s not venture capital,” Donegan said. “Timberland is for investors who are looking to stay rich, as opposed to investors looking to get rich. It’s a capital preservation strategy.”

Risk of forest fragmentation

The scramble for timberlands has left some bidders behind, including Potlatch Corp.

The Spokane firm owns 1.5 million acres of forest in Idaho, Minnesota and Arkansas. For years, Potlatch has tried to buy more land, without success.

Prices rose rapidly, and Potlatch couldn’t compete, said Penn Siegel, the company’s chief executive officer. “We’ve looked for land in each of those places where we operate, but we haven’t made any large purchases in the 15 years since the TIMOs became active,” he said.

Siegel hopes that will change in the near future. On Jan. 1, Potlatch converts to a real estate investment trust, which will cut the company’s tax rate. Raising money for land purchases will become easier, Siegel said.

As head of a wood products manufacturer that’s held onto most of its acreage, Siegel eyes the broad shift in forestland ownership with caution. The long-term legacy will be greater forest fragmentation, he said.

As investors pull in and out of funds, timberland will change hands more frequently. Each transaction increases the chance that choice real estate will be sold off for cabins and golf courses, Siegel said. As the parcels become smaller, it’s harder to manage the land for wildlife, he said.

Siegel also said public corporations are more responsive to public opinion. Their products can be boycotted, their annual meetings picketed, and the names of the largest shareholders are disclosed by law.

In the case of TIMOs, “You know that Forest Capital owns the land, but you don’t know who owns Forest Capital,” Siegel said.

Environmentalists share his concerns. During the 1990s, John Osborn bought stock in Boise Cascade. The Spokane physician used his shareholder status to lobby for corporate change, including an end to logging of old-growth timber. The maker of paper, pulp and other wood products eventually adopted extensive environmental principals.

But then, Boise Cascade split up and sold off its timber holdings to Forest Capital. Osborn was left with stock in an office-supply company. His leverage for reform is gone.

“There’s always a lot of focus on public timberland, but as these large corporate owners go through reorganizations and the land titles change, people need to pay attention,” said Osborn, the Sierra Club’s conservation chairman in Idaho and Eastern Washington. “They have a huge impact on the environment and on the economy.”

Osborn also worries about forest fragmentation. Investors intent on quick profits increase the risk of “double-liquidation,” he said. First, they strip the land of its commercial timber, Osborn said. Then, they subdivide and sell lots.

Forest Capital doesn’t compete with developers for timberland near towns or resorts, according to Donegan. The firm’s focus is acquiring land for long-term timber harvest, he said.

When Forest Capital sells land, it tends to be in areas already experiencing development pressure, Boling said. Last year, the company sold off 160 acres overlooking Lake Coeur d’Alene’s Gotham Bay. The forested parcel had become boxed in by homes, he said

Forest Capital also sold 195,000 acres of former Boise Cascade lands in southwest Idaho. The firm evaluated keeping the property in timber production, Boling said. But only one sawmill remained in the area, depressing the prices for logs. The next nearest mill was an eight-hour drive, Boling said.

When Forest Capital put the acreage up for sale, Boling was blitzed with calls. Most of the prospective buyers wanted to split off a little parcel for their dream cabin in the woods.

To Boling, the calls were one of life’s ironies. The land could have been kept intact, he said, and spared from subdivisions, if southwest Idaho had retained an active sawmill industry.