SOS Forests

The Great Montana Land Swindle Sleazes On

by Dave Skinner

The Montana Legacy Project just announced its second phase of a plan to spin off 312,000 acres of unwanted Plum Creek forest land to other buyers. The entire package was, until yesterday, priced at $510 million. Now it’s apparently $490 million.

It is my conclusion that the Legacy Project is an indicator of an “end game” in the REIT/TIMO phenomenon that has swept away the “timber industry.” Wall Street and Capitol Hill created a business and tax environment that leaves us a world in which the timber beasts are no more. They’ve been replaced by real estate beasts, with huge implications for forestry and land use all across America.

The REIT/TIMO creature was born in Montana, when Plum Creek Timber Company (NYSE:PCL), the largest private landowner in the US, pioneered the conversion of integrated forestry corporations into REIT’s with taxable operating subsidiaries. The tax advantages of doing so first put PCL in a superior cash position which in turn allowed it to buy large blocks of land from cash-strapped integrated companies.

Some of you may have read the excellent SOSF discussion [here] about the “Valuing Timberland” post put together by former Westvaco forester J. Brian Fiacco on his Timberland Blog [here]. His follow-up three installments [here, here, here] give a superb nutshell of how timberland is valued as well as what PCL and other REITs/TIMO’s do when they buy ground.

In short-short, Plum Creek busted their land up into “HBU” real estate, to log off and then sell for “trophy” homes; core timberland, to log and then manage as a forestry investment; and other lands, to log and then sell at whatever price to whatever sucker they can find.

But the low fruit on the forest money tree is now about gone. In a February 2nd Plum Creek earnings call [transcript here], one of PCL’s major investor reps notes that about 15 to 20 million acres of industrial ground has now been transacted and the big hunks are gone. PCL currently owns around eight million of that, meaning it was able to buy a third of the national pool using the cash from logging its Montana holdings and its early-adopter advantage as the first big timber REIT. But the first wave is over, the first harvest of cash profit and leverage petering out.

The next phase is clearly, to begin disposing of the junk holdings that present a negative present value or negative cash flow. And only suckers are interested in such things.

The sucker in this case is the federal government, and the government’s point-pork man, Max Sieben Baucus, D-MT. Of PCL’s junk sales in Montana, the end-buyer of 85% has been the Feds (the Forest Service), brokered through the Nature Conservancy, at prices a rational buyer would find completely nuts. The overpayment is always politically covered by cries about “conservation” and “saving land.”

The brilliant-and-good-looking people who visit W.I.S.E. know that is wrong. First, the USFS is not about conserving or saving anything. Second, the trophy real-estate market in Montana isn’t that huge in terms of the larger landscape, on the order of some 60,000 acres of admittedly-prime trophy castle ground since PCL went REIT.

PCL has made the joyous discovery that they can dispose of their underperforming ground at amazing profit margins by taking advantage of public fear of “development,” all while collecting “conservation” attaboys from the public-relations staffers of the various land-trust “partners” who in turn have their own motives for mining the public coffers.

The Montana Legacy Project is being promoted by Senator Baucus as “serving as a model for other places in the nation.”

God, I hope not.

I will defend to my last breath the right of REIT’s/TIMO’s — or whatever mutant entities they may morph into over time — to mow off and pick over their ground. From a business standpoint they have every right to “capture” every cent of legitimate value. PCL has clearly done so, and will attempt to do so as long as it exists.

But to now run to the taxpayers and sell them what is a burnt-out Yugo of a forest at Bentley prices, sorry, but that is Madoff-esque in its audacity. PCL is offering these lands to the public because no private buyer will touch them, at least not at PCL’s asking price. It’s that simple.

If the public is to be on the hook for bringing these Yugo forests back from the junkpile, then the public should pay, yep, what a Yugo is really worth.

And that ain’t very much.

***

Mike’s Note #1: Yesterday the Northwest Montana Daily Inter Lake covered a joint press release from The Nature Conservancy and The Trust for Public Land regarding Phase 2 of the Montana Legacy Project. The “non-profits” failed to disclose the amount of their windfall profits from “brokering” the deal.

Plum Creek land sells for $250 million

By JIM MANN, Daily Inter Lake, Feb 17, 2009 [here]

Two conservation groups on Tuesday announced the purchase of 111,740 acres of Plum Creek Timber Co. lands in Western Montana for $250 million.

The purchase is the second phase of the Montana Legacy Project, which ultimately will involve a total of 320,000 acres of Plum Creek lands being conveyed to state or federal agencies for a total price tag of $510 million.

The Nature Conservancy and The Trust for Public Land said the most recent closing involves lands in the Clearwater, Lolo, Rock Creek and Swan valleys that eventually will be conveyed to the U.S. Forest Service. The checkerboard lands in the Swan total 44,821 acres.

Money for the purchase came from provisions in the 2008 Farm Bill crafted by Sen. Max Baucus, D-Mont.

“I am really pleased to support this landmark conservation effort that will benefit Montana’s environment, our working forests and local communities,” Baucus said in a prepared statement. …

“It is also serving as a model for other places in the nation that want to conserve forests in the face of huge pressures to convert them to other uses,” Baucus said. …

“We’re all enormously thankful for the enduring work of Senator Max Baucus in making this historic project possible,” said Kat Imhoff, state director of The Nature Conservancy in Montana.

“With this sale, we are proud that the company has placed more than 860,000 acres of land in the country, including more than 600,000 acres in Montana, into permanent conservation,” said Rick Holley, Plum Creek’s president and chief executive officer.

The first phase of the Montana Legacy Project was announced last December. It involved the purchase of 130,000 acres of Plum Creek lands in the Fish Creek drainage northwest of Missoula and the Potomac area east of Missoula.

The third phase of the Montana Legacy Project — scheduled to close sometime in 2010 — will involve about 69,000 acres, including additional lands in the Swan and Clearwater drainages.

Imhoff said those lands potentially could go to the Montana Department of Natural Resources and Conservation, depending on the state’s funding abilities. The Montana Legislature is deliberating a bill that would authorize bond sales to raise up to $21 million for the project.

A hearing on House Bill 14 was held in the House Natural Resources Committee on Jan. 26, attracting considerable support.

“We had a lot of testimony,” Imhoff said. “It was really compelling to hear people’s passion for the landscape … There’s been tremendous support from the community in the Swan Valley.”

But not everybody is ecstatic about the Montana Legacy Project. Flathead Valley resident Dave Skinner also testified at the hearing, criticizing the project for not being transparent enough and questioning the purchase prices for land with widely varying values.

“If this was supposed to be public, where was the public involvement?” Skinner asked Tuesday. “There really wasn’t much at all.” …

Skinner said the public should have had greater influence in determining whether the lands are ultimately transferred to state or federal management and in knowing exactly what level of access will be maintained.

The purchase price on the second phase’s 111,740 acres averages out at $2,237 per acre — an amount that Skinner considers widely excessive for some lands that recently have been logged and will not be productive again for decades.

But Imhoff said some of Plum Creek’s lands in the Swan Valley were selling to private buyers for as much as $8,000 per acre while other lands that were purchased were valued as low as $400 per acre.

Imhoff said prices were arrived at through ‘very long-term negotiations’ carried out prior to last June’s announcement of the overall purchase agreement. The purchases also required thorough appraisals, she said.

Then produce them for public scrutiny, Kat. We’d also like to see the transcripts of the “very long-term negotiations”. Back room secret deals are objectionable, Kat, and quite frankly we don’t trust you. We think you are profiting hugely and wish to see full disclosure and transparency. Because otherwise we think you are a sleazy con-artist, ripping off the public big time.

We’d also like to see full disclosure of the kickbacks and “campaign donations” made to Max Baucus.

***

Mike’s Note #2: The following (supplied by Mr. Skinner) is a breakdown of the real market land values, demonstrating the enormous windfalls to Plum Creek from this land swindle.

Montana Legacy Project

Montana Legacy Project Price: $510,000,000
MLP Total Acres: 312,000
MLP Price Per Acre: $1,634
Typical Present Value of Montana Timber Land: $500 to $1,000

Foreseeable Return on Investment to State of Montana

Usual Rate of Return of typical $510,000,000 bond investment: 6 percent
Revenue-only “Rate of Return” of $510,000,000 MLP “investment:” 0.31 percent

Taxes

IRS tax-credit earmark check to MLP Partners TPL and TNC: $250,000,000
Taxes Customarily Paid by Trust For Public Land and The Nature Conservancy: $0

Inventory

Amount of standing timber needed to service $30.6 million annual interest on $510,000,000 bond, at stumpage of 175 to 265 per thousand: 2 to 2.9 billion board feet, 6,410 to 9,294 board feet per acre
Annual Harvest Required to pay Bond Interest: 115 to 174 million board feet
Annual Production Per Acre Required: 368 to 557 board feet/acre/year
Claimed standing inventory by MLP Partners: Not disclosed
Rumored standing inventory: 114 million feet, 365 board feet/acre
Rumored Net Present Value of MLP standing inventory: $20 million; $62.30/acre
Apparent inventory from Fiber Supply Agreement (FSA)
Using 9.2 million annual harvest basis: 153 million feet; $26.8 million; $86.02/acre
Using 29 million foot growth basis: 483 million feet; $84.5 million; $270.83/acre
Present value of 10,000 BF/acre harvest after 60 year rotation: $53.05/acre
Amount of timber $21.5 million would buy on open market: 123 MMBF
Constant dollar present value of Potomac planned harvest of 44.2 MMBF: $2.33 million

What 44.2 MMBF would be worth if harvested today: $7.73 million

Jobs

FSA expected share of recent annual Montana Timber Supply: 1.17 percent
Primary forest jobs MLP claims on “montanaworkingforests.org:” Not specified
MLP Jobs expected using FSA as basis: About 50-55
MLP Price per FSA job: $10.2 million
Jobs expected from 110,000 acres of Montana “share:” 16
Jobs expected from Potomac parcel given DNRC appraisal data: 4.05

Price per Potomac job: $6.67 million each

Productivity

DNRC harvest average per acre/year: 63 board feet/acre/year
Potomac ” ” ” ” “: 27.2 board feet/acre/year
MLP FSA planned harvest ” “: 28.5 board feet/acre/year
MLP FSA claimed annual growth: 92.9 board feet/acre/year

Needed Productivity from fully stocked MLP: 368-plus board feet/acre/year

Asset Basis Calculations (Based on transcript of Plum Creek 4th quarter 2008 and 3rd quarter 2008 earnings conference calls with large investor clients [here])

Aggregate for 4th quarter period: $215 million flow, profit $104 million
Other sale, 60,000 acres of “rural, unentitled” land besides MLP: Price, $65 million accounting for $28 million of the profit, on an “asset base” of $37 million ($616 per acre)
HBU Recreation land sold by PCL, 4th quarter of 2008: 7,500 acres @ $3,000 per acre
Development acres sold by PCL, 4th quarter of 2008: 45 acres @ $4,100 per acre

Phase 1: 130,000 acres

Cash flow: $150 million; asset base $76 million, profit $74 million
Phase I realized per acre price: $1,153
Phase I PCL book value/acre: $584
Phase I PCL profit per acre: $569

Book Profit margin Phase I: 97 percent

Phase 2: 112,000 acres

Cash flow, $250 million, asset base $90 million, profit $140 million
Phase II realized per acre price: $2,232
Phase II PCL book value/acre: $803
Phase II PCL profit per acre: $1,429

Book profit margin Phase II: 177 percent

Phase 3: 70,000 acres

Asking price (remainder): $100 million
Phase III planned per acre price: $1,428
Phase III book value/acre (est): Not yet known
Weighted average Phase I and II profit per acre: $892

Book Profit Margin Phase III (est): Sure to be impressive

Totals all three Phases

Estimated Average Book Value: $231million
Cash flow (est.): $490 million to $510 million
Estimated Total MLP Profit: $278 million
Estimated Average profit for MLP: $892 per acre
Most Optimistic NPV as Forest Land: $324 per acre, $101 million total
FSA-based Average NPV as Forest Land: $139 per acre, $43.4 million total

Plum Creek CEO Rick Holley, to investors: “It’s all about net present value.”