There are two simple steps to successful investing: buy low and sell high. But, as many have discovered, the devil is in the details.
Benjamin Graham, the proponent of ‘value investing’, and Warren Buffett’s mentor, said: ‘the individual investor should … be able to justify every purchase he makes and each price he pays by impersonal, objective reasoning that satisfies him that he is getting more than his money’s worth for his purchase.’ Buffett paraphrased that rather ponderous statement by simply saying: ‘price is what you pay, value is what you get.’
Buffett’s quote highlights the two elements that Compass South focuses on when identifying and acquiring timberland for our clients. First, we have to figure out the real value of the property. Second, we have to negotiate the price and terms that suit our investor’s purpose.
Once property has been acquired, like any other investment, it needs to be managed. Many of our clients have great experience in this. Some don’t. For those who need some help, we provide it.
Buying right is the heart of investing. In the case of timberland a good buyer needs to have three critical attributes: a deep knowledge and understanding of the market; a wide and informed group of contacts; and, the resources and ability to properly analyze and understand the data that accompanies any significant timberland transaction.
For those of our clients who feel they lack those attributes, we provide an exceptional timberland acquisition service, focusing on evaluating the opportunities in the light of that particular investor’s goals or strategy, and negotiating the acquisition.
On any given day, there are numerous timberland tracts being offered for sale. On any given day, we get phone calls and emails about tracts and land packages that are about to be offered for sale. On almost every day, we pass on all those opportunities. Once in a while, we stop and dig a little deeper. Sometimes, we’ll really dig. Very occasionally, we’ll say ‘aha’. That one in many is the one we’ll make a bid on.
Our evaluation process is not rocket-science. It usually starts with some simple parameters, such as the acreage, location and price sought for the property. With that limited information, we, as experienced timberland buyers, can quickly identify a potentially good investment. If that potential is there, our next step is to get more information, and, if that looks encouraging, visit the property.
The site visit is critical. Being experienced foresters, we can quickly determine the approximate value of the growing timber and compare that with any data provided by the seller to make sure there are no significant discrepancies. In addition, a site visit allows us to identify site-related issues, such as topographical, access or drainage problems, together with relevant area factors, whether adverse or positive, that could affect the value of the underlying land.
Timberland has two value elements: the growing timber and the underlying ‘bare’ land. The site visit will allow us to estimate of the value of the growing timber. An in-depth analysis, using our proprietary timberland sales database and appraisal expertise, will allow us to determine the ‘bare’ land value. From this analysis, we can determine whether or not the target property warrants a purchase offer.
Buying timberland is very much a game of negotiation. While anybody can do this, a successful negotiator needs a lot of market experience, the knowledge and ability to focus on the property’s true value, and the ability to walk from any deal that fails to meet the investor’s criteria.
There is no specific management blueprint for all timberland owners. Some owners are sophisticated in their knowledge, some are not. Some are very ‘hands-on’, some are not. We are all different. As a timberland manager, our first job is to figure out what the owner wants or, if they don’t know what they want, lead them through the decision-making processes.
Owning timberland brings with it a multitude of choices – not one of which has to be addressed. Indeed, there are timberland owners who ignore their property for decades. However, most owners have some level of interest in their property and that leads them to choices that support and enhance that interest. These fall into three broad categories: land use and maintenance; financial; and, environmental.
Land use & Maintenance
Timberland, like any other asset, should not be neglected. If it is, the owner may start having problems. Relatively common issues include: trespassers; insects; fire hazards; boundary encroachments, access and drainage. Not to mention, of course, the trees, which need light and space to flourish and grow.
Compass South is very experienced in dealing with the myriad problems associated with owning timberland and provides a ‘Land Management Plan’ designed to address these issues through a combination of specific actions and periodic inspection.
The first action we take is the relatively obvious one of mapping the property and creating not only accurate boundary maps and aerials but also detailed stand by stand timber-type maps. This forms the basis of our Plan.
Trespassers can be both dangerous and destructive. The simple solution is to lease the property to a responsible and qualified hunt club, who will look after the property and act as a significant deterrent to trespassers – not to mention paying rent.
Insects and fire hazards are always going to occur in forests. Both can be controlled. Our Plan includes periodic tract and stand inspections designed to control fire and insect hazards. Finally, the inspections provide periodic assessments of the quality and condition of the growing timber and identify drainage issues that will affect those conditions.
Property encroachments, broken gates or locks and poor fencing tend to go together. Again, periodic inspections will identify these issues. So, as part of the Plan’s inspections, we also check the perimeter for encroachment issues.
Financial considerations are often paramount with timberland owners and cover a wide spectrum. On the cash inflow side, some owners want assistance with a relatively simple, one-time harvesting of some timber, while others want a highly sophisticated multi-decade cost and revenue analysis that dictates the cutting schedule. Some are interested in the tax benefits of conservation easements, while others need help with the often fleeting state tax credits. On the cash outflow side, property taxes are important as is keeping up with the local authorities, particularly when the timberland holdings are large and the properties lie in multiple jurisdictions. Cash inflows are often associated with outflows, as is the case, after clear-cutting, when re-forestation is needed.
Each of these financial events or considerations could probably be handled by the owner, if they have the time, the inclination and the knowledge. If they don’t, we have the experience and the ability to properly address each of them.
Compass South is not an environmental consultancy. However, we are well-versed in the issues that timberland owners encounter, whether it be endangered species, wetlands, environmental impact studies or just wildlife management. Because of our experience, we can assist timberland owners in identifying potential issues and, if necessary, finding the appropriate specialist to address that issue.