Not for distribution SUSTAINABLE FORESTRY INVESTMENT Cary Wingfield Raditz, CFA

Not for distribution 07-Jun-07Cary Wingfield Raditz, CFA p2p2 Total Global Forestry Investment  Total investable and leasable global forestlands estimated > 870 million ha  Value > US$480 billion  Forestry investment growing 20% p.a. for 20 years  US$35 billion invested mainly in US  US$20 billion held by institutional investors

Not for distribution 07-Jun-07Cary Wingfield Raditz, CFA p3p3 Timber: the Investment Class  Predictable biological growth  Asset growth= forest growth  Inventory=stored on the stump  Strong historical returns  Moderate risk  High returns on risk*  Portfolio diversification characteristics * Sharpe ratio

Not for distribution 07-Jun-07Cary Wingfield Raditz, CFA p4p4 Returns & Risk Asset ClassReturnsRisk*Sharpe ratio Timberland14.54%14.80%53.79% Small Cap Equities14.20%22.37%34.06% S&P %17.99%22.68% Commercial Real Estate9.53%5.70%51.75% International Equities9.35%22.24%12.46% Long term Corporate Bonds9.28%11.52%23.44% US Treasury Bills6.58%2.73%0.00% *Sharpe ratio = (asset return–return on risk free asset) / risk [standard deviation]

Not for distribution 07-Jun-07Cary Wingfield Raditz, CFA p5p5 Attributes of Return  Biological tree growth  Timber price changes  Changes in the value of the underlying land asset  Non-timber forest products and services—ancillary cash flows

Not for distribution 07-Jun-07Cary Wingfield Raditz, CFA p6p6 Timber Reduces Portfolio Risk

Not for distribution 07-Jun-07Cary Wingfield Raditz, CFA p7p7 Investment Suitability of Timber  > 10 years = illiquid  Long-term institutional portfolios  Endowments, foundations, pension funds, insurance companies, high-net worth  Matches maturity of longterm assets to maturity of longterm liabilities  Low correlation to equities and fixed income provides diversification  Certified forestland suitable for socially responsible investors

Not for distribution 07-Jun-07Cary Wingfield Raditz, CFA p8p8 Investment Vehicles  Purchase forestland—manage timber assets  Forestry product equities  Forestry product bonds  REITS—real estate investment trusts  TIMOS—Timber Investment Management Organizations  Private equity partnerships

Not for distribution 07-Jun-07Cary Wingfield Raditz, CFA p9p9 Environmental Issues  Climate change  Soil and freshwater conservation  Loss of biodiversity  Forest systems play a critical role in managing environmental problems

Not for distribution 07-Jun-07Cary Wingfield Raditz, CFA p10 Forestland Management Methods  Clear cutting (controversial)  Pure conservation—tax deductible gifts of forestland  Sustainable forestry management—”pure play”  Forestry operations includes processing  Certified forests (FSC)—biodiversity  Non-timber forest products (NTFPs)  Capturing PES cash flows--e.g., CERs  Structured methods—e.g. easements

Not for distribution 07-Jun-07Cary Wingfield Raditz, CFA p11 Tropical Forestry Investments  Fast growing in tropics (short rotation)  High discount for Emerging Markets risk  Controversial (Equator Principles)  Lessons learned: Mitigate country risk (management, rigorous internal controls, portfolio diversification)  :Factor costs of poor infrastructural  :Neutralize corruption risk  :Coop local community participation in forest management  :Certify forests  :Manage non-timber forest products  :Monitize tradable carbon emissions rights (CERs)

Not for distribution 07-Jun-07Cary Wingfield Raditz, CFA p12 Payments for Eco-services  Carbon sequestration--CERs  Water use rights—local (New York City)  Biodiversity—FSC certified (Precious Woods)  Eco-tourism (Texas Inland—hunting rights)  Conservation easements (USA e.g., Forest Legacy Trust)  Tradable development rights (USA locally regulated)

Not for distribution 07-Jun-07Cary Wingfield Raditz, CFA p13 Implications for Investment Valuation  Value = Σ of discounted future cashflows  NTFPs and PES are real options  When exercised: PES provide ancillary cash flows  “Value enhancements”  Reduce illiquidity in afforestation  PES converge private good and public good agenda

Not for distribution 07-Jun-07Cary Wingfield Raditz, CFA p14 Timber Conservation Strategies 1. Pure Conservation 2. Sustainable Harvesting 3. Creative Structured Solutions 4. Example: Selling Easements

Not for distribution 07-Jun-07Cary Wingfield Raditz, CFA p15 1.Pure Conservation  No return of principal or income  Forestland gift is tax deductible  Appropriate for land having special value or unsuitable for logging  Example: green belts near urban centers, old-growth riparian forests

Not for distribution 07-Jun-07Cary Wingfield Raditz, CFA p16 2.Sustainable Harvesting  Land harvested sustainably (< 6% of board ft/year)  Sub-optimal timber returns, but is still solid investment  Short-term positive impact on environment  Either requires very long investment horizon or sale of most of land to capture principal and return on capital

Not for distribution 07-Jun-07Cary Wingfield Raditz, CFA p17 3.Structured Solutions  Incorporate PES  Tax sensitive strategies--Easements  Partner with non-profit govt and NGOs (Sierra Club)  Structure for socially responsible investment market

Not for distribution 07-Jun-07Cary Wingfield Raditz, CFA p18 Selling Easements  Conservation easements  Development easements  Optimal or near optimal investment returns  Fair short term/Good  long term environmental impact  Requires foundation and non-profit funds

Not for distribution 07-Jun-07Cary Wingfield Raditz, CFA p19 Easement Return and Impact  Benefits: Conserve wildlife habitat, clean watersheds, prevent urban sprawl, preserve valuable forestland  Purchase land with merchantable timber  Agree to environmental easement on the property at beginning  Satisfy the environmental guideline test  Provide investors tax-deductible contributions  Through careful replanting, return the ecosystem to its natural pre-logging state  At end of term, put the land into permanent conservation through a land trust

Not for distribution 07-Jun-07Cary Wingfield Raditz, CFA p20 Is it Time to Invest?  Opportunities for creative, sustainable solutions  New SRI listings in capital markets  Select opportunities in emerging markets  Environment awareness will increase value of certified wood  New international protocols will increase demand and price of carbon and other PES

Not for distribution 07-Jun-07Cary Wingfield Raditz, CFA p21 Sources of Information   Private placement memorandum  Initial public offering prospectus  Hancock Timber Resource Group  Rights and Resources