U.S. Timberlands Company, L.P.
U.S. Timberlands Company, L.P.
Incorporated: 1996 as U.S. Timberlands Klamath Falls
Sales: $75.6 million (2000)
Stock Exchanges: NASDAQ
Ticker Symbol: TIMBZ
NAIC: 113110 Timber Tract Operations
U.S. Timberlands Company, L.P. is a publicly traded partnership that owns more than 550,000 acres of timberland in Oregon and Washington; its corporate offices are located in New York City. The company harvests logs that are sold to third parties to be converted into construction products such as doors, millwork, plywood, laminated veneer lumber, particleboard, and hardboard. The timber is also used in paper and other products. To reforest its acreage, U.S. Timberlands also owns and operates a seed orchard, which each year produces five million conifer seedlings, approximately half of which are sold to other forest products companies. U.S. Timberlands has also formed an affiliate, Fiber Resource Services, to develop methods of recovering smaller trees that have been left behind in harvesting efforts. Rather than offering shares like a corporation, U.S. Timberlands elected to sell partnership units in its 1997 initial public offering. Because the company is a master limited partnership it generally pays no taxes. Unitholders are responsible for reporting their portion of income, gains, losses, deductions, and the like. Rather than receiving dividends, unitholders receive quarterly distributions. Unlike most shareholders in a corporation, however, they have no voting rights. Poor economic conditions in the timber industry caused management to suspend distributions in 2001 and to begin efforts to take the company private. Several unitholders filed suit to prevent the move.
Ripe Time for Timber Investments: 1990s
There was only one timberland investment management company in 1981. Five years later there would be six, with assets that amounted to less than $100 million. By 1990 those assets would grow to $600 million, and just two years later would exceed $2 billion. Traditionally institutional investors shied away from timberland because they simply did not understand the business. It was a specialized niche, relegated to the noncore real estate category. The raw numbers, however, now began to attract the big investors. After inflation it was estimated that timberland could produce an 8 percent annual return, with timber prices likely to increase as future demand was expected to outpace supply. Tighter environmental restrictions actually placed a check on supply, resulting in higher prices. Furthermore, the rising standard of living in Japan and other Pacific Rim countries also looked to fuel increasing demand. In 1994 two asset-based timberland performance measures were introduced as much to reassure institutional investors as to provide a tool to assess potential returns on investment. By 1998 institutional timberland investments reached $5.5 billion; yet this was a mere dot on the radar screen when compared to the $5 trillion in total institutional investments. Although timberland was coming into its own with investors, many still questioned whether it would remain competitive in the long-term with other assets.
U.S. Timberlands became an investment choice in 1997 when it made an initial public offering of units, selling more than seven million shares of the limited partnership at $21 each. An additional 1.1 million shares were sold a month later, bringing the total offering to more than 8.5 million shares. In all, the offering raised $225 million. The operations of the company were conducted by a subsidiary, U.S. Timberlands Klamath Falls (USTK), which had been formed a year earlier to buy a large tract of Oregon timberland from Weyerhaeuser Company.
After 100 years in business, Weyerhaeuser owned or leased some five million acres of timberland. In 1996 it decided to sell 600,000 acres of forest in the Klamath Falls, Oregon, area as part of a strategy to return to the company’s traditional focus: the processing of Douglas Fir trees. The Klamath Falls land consisted mostly of Ponderosa and Lodgepole Pine trees. USTK was actually outbid by another company, Klamath Pacific International Inc., which had also been formed for the sole purpose of acquiring the acreage. Klamath Pacific agreed to pay $304 million, besting USTK’s bid of $303 million; but just five days after signing the pact, Weyerhaeuser backed out, concerned over the financing of Klamath Pacific, which planned to take out a loan for $300 million of the total purchase price. Weyerhaeuser then began to negotiate with USTK and several weeks later struck a deal for $309 million. In addition to 600,000 acres of forest, USTK received 3,000 acres from the Weyerhaeuser Foundation, plus three mills, a seed orchard operation, and a nursery. In order to concentrate on managing its lumber holdings, USTK sold the mills to another company, Collins Holdings, with a ten-year agreement to supply logs. The Collins deal was large enough to account for as much as one-quarter of the company’s total harvest, but essentially USTK could sell as many trees as it felled; the key was harvesting the timber at the same rate that the forests could be replenished. Klamath Pacific sued Weyerhaeuser over the sale to USTK, alleging that it had been used as a stalking horse to bid up the price. It also contended that Weyerhaeuser agreed to finance $130 million of the USTK deal, an offer that was not made to Klamath Pacific. The breach-of-contract suit would be litigated over the next four years. In June 2000, a jury in the U.S. District Court in Portland, Oregon, awarded Klamath Pacific $12.1 million in damages. Nevertheless, U.S. Timberlands had its acreage.
Purchasing More Acreage: 1997
Before the U.S. Timberlands 1997 public offering, USTK added to its Oregon holdings by acquiring 42,000 acres, plus cutting rights on 3,000 additional acres, from the Ochoco Lumber Company. It considered the Ochoco trees to be a good fit with Klamath Falls, both in terms of species and age classes. So much of the economics of the timber industry is predicated on species and age. The company mostly owned softwood, which accounts for two-thirds of the world’s industrial wood production. Softwood is preferred over hardwood because of its long fibre, strength, and flexibility. Until trees reach a certain age, however, they are not large enough to be considered merchantable timber. Douglas Fir and Hemlock of the Northwest, for instance, is not merchantable until the trees are in the 55- to 70-year range. The smallest merchantable trees, used for pulp, are generally at least ten years of age. Of the land U.S. Timberlands bought from Weyerhaeuser, 180,000 acres were part of a plantation established in the early 1960s. Most of its trees, ranging in age from one to 37 years, were not yet merchantable. The rest of the Klamath Falls acreage were natural stands and represented the immediate source of timber that the company could harvest, estimated to represent 2.2 billion board feet. Over 40 percent of the Ochoco timber was more than 80 years old. Of the company’s total merchantable timber, 47 percent was ponderosa pine; 20 percent, white fir; 17 percent, lodgepole pine; 13 percent, Douglas fir; and the remaining 3 percent, other species, including cedar, sugar pine, and western larch.
John M. Rudey was named chairman and chief executive officer to run U.S. Timberlands out of its midtown Manhattan offices. He had experience managing timber holdings, serving since 1992 as CEO of Gerrin Properties Holdings, a private investment firm that concentrated on timber and real estate. After completing U.S. Timberland’s IPO he opened a small Seattle, Washington, office to oversee the day-to-day timber operations, naming an experienced Northwest executive, Allen E. Symington, to serve as president and chief financial officer. Symington had held a number of management positions at privately owned Simpson Timber Investment Company, which he joined in 1962.
The company’s strategy was simply to sell lumber and grow trees, as well as keep an eye out for undervalued timberland to acquire. Each year it would determine a harvesting plan, targeting tracts where allowing trees to continue to grow would provide diminishing economic returns. Simply put, each species enjoys a growth rate and at a certain age begins to slow down, at which point the additional wood that might be realized falls below the desired rate of return on the investment in the acreage. Once the timber was contracted for, the company would either hire a third party to harvest the acreage and arrange for a trucking company to deliver the logs to the customer, or it would price on a “stumpage” basis to the customer, who would be responsible for harvesting and delivery. Harvested acreage would then be reforested to maintain a consistent level of resources for the company. Moreover, U.S. Timberlands expressed a desire to manage its holding in an environmentally responsible manner. For investors, the company hoped to begin making quarterly distributions on May 15, 1998. The minimum distribution was expected to be 50 cents per unit.
U.S. Timberlands is pursuing a strategy for growth that focuses on increasing cash flow and providing value to Unitholders. At the forefront of this strategy is the objective of maximizing productivity. U.S. Timberlands utilizes various modern forestry practices on its timberlands. In particular, U.S. Timberlands’ computerized geographic information system (GIS) enables it to develop optimal harvest plans. U.S. Timberlands’sophisticated forestry practices include the application of selective harvesting and thinning practices, which improve the productivity of the remaining stand while providing merchantable timber for sale, and the development of genetically selected seedlings to grow trees with desirable traits such as smaller branch size and increased volume yield per acre .
Major Challenges During 1998
U.S. Timberlands would be challenged on two major fronts in 1998. Timber prices that were strong at the beginning of the year would soon weaken because of a number of factors. Demand for wood products in Asia fell dramatically because of a severe economic downturn in the region, thus creating an oversupply in the United States. Fires in Florida blackened almost 3 percent of the state’s trees, which had to be harvested because their bark was now susceptible to attack by disease and insects. Furthermore a U.S. Department of Agriculture program that encouraged farmers to plant pine trees to save land now required farmers to clear 500 trees an acre in order to retain subsidies. After the program had been in effect for more than ten years, conservationists had learned that wildlife had been hurt by a pine canopy that allowed too little sunlight to penetrate. Eliminating the trees would alleviate the problem, but the removal of the trees only added to the glut of lumber and pulp on the market. Even though the United States was enjoying a building boom, usually a good sign for the timber industry, the oversupply of wood resulted in falling prices.
While prices were cyclical and could expect to bounce back, U.S. Timberlands faced a potentially more serious problem in 1998: an Oregon ballot initiative called Measure 64. In essence it would eliminate “clear cutting,” a practice in which large areas of forest are completely harvested. Environmentalists backing the measure equated clear cutting with strip mining and maintained that it was a catastrophe for a watershed. Measure 64 would force timber companies to practice selective cutting by protecting all trees more than 30 inches in diameter and requiring a certain number of trees to be left standing. According to the Oregon Department of Forestry the measure would reduce the amount of lumber coming out of the state by 60-65 percent. Because all of U.S. Timberland’s acreage was located in the state, the passage of Measure 64 could be devastating. Management announced its willingness to go to court to sue the state for an illegal taking of private property. It joined other timber companies in raising some $5 million for a campaign to fight the ballot question, while proponents scraped together $300,000. In November 1998, Measure 64 was soundly defeated by the voters of Oregon.
U.S. Timberland posted poor results in 1998. Revenues fell to $71.3 million, from $77.3 million the year before, and the company lost $6.4 million. Moreover, because of low prices for timber, the company had logged at an unsustainable rate in order to boost revenues. In the beginning of 1999, Rudey fired Symington and his two lieutenants and closed down the Seattle office. Symington maintained that his team had performed well under adverse business conditions. Nevertheless, Rudey took over as president, and the running of the company was now split between New York and operations headquarters in Klamath Falls.
U.S. Timberlands enjoyed a better year in 1999. The U.S. economy remained strong and Asia showed improvement, resulting in a rebound in the price of logs and timber. In an effort to diversify its holdings, especially important after the scare of Measure 64, the company invested in acreage in Washington. An affiliate, U.S. Timberlands Yakima, bought 56,000 acres of forest for $60 million from paper producer Boise Cascade Corporation. U.S. Timberlands contributed $294,000 in cash for a 49 percent stake in the affiliate. As part of the land deal, U.S. Timberlands Yakima agreed to supply Boise with logs. Just as manufacturers were in recent years selling their factories to outsourcers who would actually produce the goods, paper producers were also selling off their forests. As long as they had access to pulp, there was little need to keep 50 years’ worth of trees on the books. Overall in 1999, U.S. Timberlands increased its revenues to just under $77 million, and reported net income of approximately $6.3 million.
The fortunes of U.S. Timberlands again turned sour in 2000. The lumber market experienced another slump and the price of the company’s shares fell steadily. By November 2000, units that had originally been sold at $21 had dipped below $5. Management announced that it was investigating the possibility of taking the company private “as a means to enhance shareholder value,” according to a company spokesperson. Several class action lawsuits were filed by unitholders against the board of directors, alleging a breach of fiduciary responsibility. For 2000, U.S. Timberlands would report a drop in revenues, from $77 million in 1999 to $75.6 million, as well as a net loss of $4.1 million. Although in January 2001 the company would announce its 12th consecutive quarterly distribution, in May it opted to indefinitely suspend distributions after announcing a loss of $8.8 million in the first quarter of the year. In a comparable period the previous year, the company had lost $1.8 million. Revenues were also down by 20 percent. A group of investors controlled by management then announced that it had made a $100 million buyout offer, comprised of cash and promissory notes. Given this proposal and the pending litigation by unitholders, the future of U.S. Timberlands was, at best, murky.
U.S. Timberlands Klamath Falls, L.L.C.; U.S. Timberlands Management Company, L.L.C.
Georgia-Pacific Corporation; Hampton Affiliates; Simpson Investment Company.
- U.S. Timberlands Klamath Falls (USTK) is formed to acquire acreage from Weyerhaeuser.
- U.S. Timberlands Company is incorporated and completes an initial public offering; USTK becomes a subsidiary company.
- Seattle office is closed; Washington acreage is purchased from Boise Cascade.
- Quarterly distributions are suspended; management-led group of investors makes offer to take company private.
“Ailing U.S. Timberlands Receives $100 Million Buyout Offer,” Puget Sound Business Journal, May 11, 2001.
Barnard, Jeff, “Grass-Roots Ballot Measure Seeks to Ax Clear-Cutting in Oregon,” Los Angeles Times, October 18, 1998, p. 5.
Caulfield, Jon P., “Timberland in Institutional Portfolios and the Question of Persistence,” Forest Products Journal, April 1998, pp. 23–28.
——, Timberland Return Drivers and Invest Styles for an Asset That Has Come of Age,” Real Estate Finance, Winter 1998, pp. 65–78.
Erb, George, “A Clearcut Threat,” Puget Sound Business Journal, September 21, 1998.
——, “Executives Axed at U.S. Timberlands,” Puget Sound Business Journal, January 22, 1999.
Harwood, Joe, “Executives Consider Privatizing New York-Based Timber Firm,” Register Guard, November 6, 2000.
Jones, Steven D., “Timber-Cutting Initiative: The Key Is in the Fine Print,” Wall Street Journal/Northwest, October 7, 1998, p. NW1.
“U.S. Timberlands Unit Buying Boise Cascade Forest Land,” New York Times, June 10, 1999, p. 4.
“Weyerhaeuser Co.: Oregon Plants and Forest to Be Sold for $309 Million,” Wall Street Journal, June 24, 1996, p. B4.
Winninghoff, Ellie, “Go Hug a Tree,” Forbes, September 13, 1993, p. 208.