The new of board of SDS Lumber Company appointed this past September has provided a glimpse into their thinking in the selection of a broker to manage the sale of SDS and its assets: Perella Weinberg, a New York-based investment banker that often serves as an outside chief investment officer for institutional investors such as university endowments, pension funds, foundations, family groups and other pools of capital.
Noo Yawk? Yes. Unlike prior efforts to sell SDS to major northwest timber operations, the Perella Weinberg appointment points more toward the creation of a timber investment management operation that will be owned by “investor-owners” who can afford the long-term investment horizons ideal for the timber industry.
The Perella Weinberg announcement—which they are calling “Project Steelhead”—makes clear they would prefer a single buyer for the SDS mill in Bingen and the company’s nearly 100,000 acres of timberland In Washington and Oregon. However they indicate the mill and timberlands “are available together or standalone.”
The Project Steelhead document points to two areas where the profitability of company operations can be improved: 1) managing the timberlands using the “opportunity to increase harvest level” and 2) addressing the “current underutilization of the stud mill (operating on one shift) results in production levels below potential.”
The “ancillary” SDS assets, including its marine transportation business (barges and tugboats), commercial and hotel properties, and wind power licenses, are characterized as “non-core assets” which could be sold to raise capital for new operations.
The new direction offers some hope for Bingen and nearby communities in Klickitat and Skamania counties. The goal suggests a tightly managed timber operation structured to produce long term profits for a new group of owner-investors. This implies that the timberlands would not be sold piecemeal to other local buyers, and that mill could continue to operate in Bingen.
On the other hand, the “opportunity to increase harvest levels” would mean that more trees would be cut more quickly. The current 60 year harvest rotation, which translates to 1,700 acres per year, could accelerate to a more frequent 45 year harvest rotation, producing 2,200 acres of harvest per year, an increase of nearly 30 percent.
There is already a similar timber management operation (TIMO) in the Columbia Gorge, the Hancock Timber Resource Group (HTRG), which manages not only more than a half a million acres in Washington, but also has over 5 million acres of timber elsewhere in the US and worldwide. HTRG is a subsidiary of Manulife Financial, a Canadian finance and insurance company. Worldwide, TIMOs managed over $60 billion in timberlands. The 2008 recession, however, hit the industry hard.
Most TIMOs are not vertically integrated from forest to mill and wood products. The majority primarily own timberlands unencumbered by mills that demand to be fed a steady diet of logs day in, day out. Timber companies that do manage mills as well as timberlands either see themselves as being primarily in the “wood products” business or have acquired legacy mills as part of their timberland acquisitions. A few TIMOs are purchasing mills because it gives them the ability to deliver specialized timber products to customers. Currently the 100,000 acres of SDS timberlands only supply half of the logs needed by the mill in Bingen.
Historically the timber industry has enjoyed a solid position among institutional investors, only in part because the demand for timber and wood products in increasing. Timber investors also until 2008 have produced better returns for investors than stocks and bonds and have served as a hedge against inflation. Recently, timberlands in the west have begun to be recognized as offering an additional revenue stream: carbon credits, traded to industries that do not by themselves meet pollution reduction targets.
It’s complicated. Converting SDS Lumber into an attractive investment for institutional investors will take time and major effort. Will the vertically integrated SDS Lumber operation even be of interest to institutional investors? Now that SDS has appointed Perella Weinberg as their broker, the pace of inquiries will quicken. Stay tuned.