Thursday, 10 May 2012

Forestry Tasmania's shrinking estate

Forestry Tasmania is not as bad as Geoff Law suggests in a recent posting Forestry Tasmania: A compelling case for reform: HERE.

It’s far worse.

The sale of Taswood Growers’ 46,000 hectare softwood plantation estate of which FT was a 50% joint venture (JV) partner was just another indecent hasty grab for cash, much like the TOTE sale.

Whilst we still own the land we will get no rental return for the next 57 years.

The sale has coincided with Gunns’ efforts to dispose of its 45,000 hectare softwood estate acquired as part of the Auspine deal, so it’s quite interesting to compare both deals, to try to understand how plantations are valued, arguably essential if we are to update the current failed forestry public policy model.

Gunns acquired its estate for $435 million in 2008, $219 million for land and roads and $216 million for the trees.

As at June 2008 FT’s 50% share of the JV trees was listed in its financial accounts at $105 million, implying the full 46,000 hectares of trees were valued at $210 million, not much different to Gunns’ similar-sized estate.

The value of the underlying land used in the JV and managed by FT was not separately itemised in its accounts. The land has since been described by the new tree owners as “generally flat to rolling terrain, with good rainfall” so at June 2008 it was probably worth at least as much as Gunns’ land at that time, in other words about $200 million.

In 2010 FT wrote down the value of all the land entrusted to it, to a zero figure by arranging for an eminent valuer to assign the future meagre returns from the plantations to the trees component alone, leaving nothing as a ‘share’ to the land component. No income then no value.

In 2012 the trees were sold for $156 million to the Australia New Zealand Forest Fund, a forestry investment fund managed by Sydney-based New Forests Pty Limited.

Actually what was sold was a forestry right issued pursuant to the Forestry Rights Registration Act 1990 .The purchase price included a right to use the land. The new owners have effectively purchased, inter alia, the right to use the land previously held by Taswood Growers.

The new owners of the trees have a right to use the land until 2069 without paying any rent whatsoever to the landlord. That’s the way forestry rights work. They’ll pay rates but no doubt if the land is worthless they’ll be arguing for a rates reduction.

So from June 2008 until now the value of the land and trees comprising the 46,000 hectare estate has fallen from $410 million to $156 million. FT will end up with 50% or $78 million, $40 million of which goes to Tascorp for loan extinguishment whilst the balance is needed to refill the TCFA cash tin prematurely raided by FT to fund ordinary operations.

We still own the land but it is virtually worthless for the next 57 years because it produces a nil return. The rent forgone is a subsidy to the new owners of the softwood plantation. They only paid a little over $3,000 per hectare for the trees of varying ages from newly established to harvestable when establishment costs, and I stand to be corrected, are about $2,000 per hectare.

It is difficult to envisage a farmer selling his standing crops or livestock then granting the Purchaser rent free use of his land for 57 years.

The use of forestry rights is a useful way for say a vendor to sell land but to retain ‘possession’ of a plantation for a few years until harvest, with an adjustment made to the sale price to reflect the rent free period. But a rent free period for 57 years….......??

The JV was marginally profitable over the years for FT but it generated no surplus cash as that was used by FT to fund its share of new plantations and expenditure on roads. The latter doesn’t appear in the JV financials, which leads to the only conclusion that FT was responsible for the outlay. It is not certain whether FT on behalf of the landowner will continue to pay these expenses. As a general rule when a forestry right is transferred from one party to another the rights and obligations of the land owner remain unaltered.

Investors are often happy to capitalise expenses if it means they can be recouped upon disposal.

Alas this was not the case with FT’s JV. The sale price of its 50% interest failed to recoup any of the capitalised expenditure incurred since inception of the JV. The sale price reflected a zero real return on its original investment over the period.

Gunns has adopted a slightly different approach. In 2009 it sold 33,000 hectares of trees from the Auspine parcel (cost $150 million) for $173 million. The buyer was GMO. In this case it was just the trees; it wasn’t a forestry right that was sold. Gunns’ bankers wouldn’t permit the registration and subsequent sale of a forestry right where a purchaser may be able to use the land for another 50 years. Presumably the new tree owner was a short term tenant instead.

As at June 2010 the remaining 12,000 hectares of trees (cost price $66 million) were valued at $88 million and the 45,000 hectares of land at $222 million, a total of $310 million.

A year later the land and remaining trees were valued at $134 million, still awaiting a buyer.

The latest word is that the land and trees will be transferred into a new entity, together with the initial tranche of 33,000 hectares of trees sold to GMO, FT’s JV partner in Taswood Growers. The transfer value of the land and remaining trees is $120 million.

The new entity will thus end up with the entire 45,000 hectare estate, both land and trees. It will be managed by New Forests.

This is not to say Gunns will realise $120 million when it manages to find a buyer for its interest in the new entity.

It’s taken an eternity for Gunns to get to the stage where the plantation land appears to have a value. But at least it tried a little harder than FT.

Gunns’ difficulty with extracting value from its softwood plantation land emphasises the problems with getting willing investors to see value in its Tasmanian hardwood plantation land leased to thousands of MIS investors. This land is the asset that Gunns hopes a pulp mill JV partner will recognise as being worth as much as Gunns’ books show.

If it took forever to organise a deal for the softwood land where there was only one tenant, how hard will it be to get investors interested in land leased to thousands of grumpy growers regretting their MISadventure.

Therein lies the core problem for Gunns. It can’t do anything whilst its only asset is land mortgaged to the hilt and leased to thousands of growers. Nobody in certifiable and sober condition will invest in a company with assets tied up like that. The long awaited $400 million capital raising is first and foremost needed to free Gunns from the bankers’ yoke. Even then a pulp mill JV partner may attribute a low value to Gunns’ land as did James W Sewall Company, FT’s valuers, so what will Gunns do then?

It’s a little difficult to reconcile how Gunns’ land is worth about $100 million and FT’s softwood land had a nil value. The sale of the forestry rights was a decision for the JV partners but the shareholder Minister indicated his support. FT’s motivation was much needed cash, not worrying about what the implied value of the underlying land meant for future resource allocation in the forestry industry.

If FT has correctly valued its asset prior to sale, it implies that softwood growing will only produce a market acceptable rate of return if the land has a nil value, in other words, provided the land owner doesn’t expect a return on the land.

So why does public policy continue to allocate public resources in this way. In austere times, especially, it makes little sense to channel funds through FT and tie up land with no compensatory return to the landowner.

It’s difficult to argue that’s it’s not another handout to the industry.

But the issue is not assistance per se, but ensuring that any assistance is transparent and helps achieve desirable public policy outcomes. Which was hardly the case with the FT/GMO JV arrangement as it was barely profitable, produced nil cash surpluses and nil capital growth but nevertheless managed to inflict enormous collateral damage on the vulnerable town of Scottsdale.

The implication for FT’s hardwood plantations is arguably worse. There is no way the $6,000 per hectare establishment and pruning costs for the TCFA inspired 16,000 hectares of the most expensive plantations in the world (according to Greg L’Estrange) will produce an acceptable return, let alone any return on the underlying land. There’s about 55,000 hectares of hardwood plantations on State land (including 15,000 private plantations and 8,500 hectares of JV plantations in which FT is a JV partner). FT valuers reckon the land has a nil value, which is fine from FT’s accounting point of view because it doesn’t own the land anyway, but what are the implications for public policy making? If softwood plantation land is included that makes a total of 100,000 hectares of State land producing a nil return to the State in respect of the land, and losses in respect of the trees.

As the Auditor General said in April 2009 “investment in roads and plantations over the past 15 years will not yield future benefits to Forestry and arguably should be expensed rather than capitalised”. The question for public policy makers is why incur the losses in the first case?

The world is in the process of reassessing and revaluing assets such as land and water. Cashed up sovereign wealth funds, pension funds and funds such as New Forests are able to assert their dominant position at the negotiating table. Forest companies are easy prey, unprofitable with ravaged balance sheets following their self inflicted MIS woes and the collapse of native forest woodchipping, all retained earnings gone, contributed equity fast disappearing, cash flow negative and with liabilities to service. This means only one thing and that is the sale of assets at bargain prices.

Despite these factors, FT handing over 46,000 hectares of State land effectively rent free for 57 years sets a new benchmark. Hopefully the architects of the new forestry industry don’t continue to point us down this path.

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