How to Increase Understanding and Insight in Forest Finance

Forest finance is the language of managing timber resources as investments. It addresses three questions. First, the investment decision considers, “How do we screen, value and rank our alternatives?” Second, the financing decision asks, “How do we pay for this?” Third, the exit or sale decision asks, “How and when is the appropriate time – during good markets or bad – to harvest or sell the asset to maximize profits?”

In Forisk’s Applied Forest Finance short course and the book Forest Finance Simplified, we review and practice the application of financial formulas to help us decide how to invest in our forests. In addition, we talk about ways that forest owners and forestry professionals can broaden their skills. To me, the opportunity is to be and remain knowledgeable and strong in at least one of the following areas in addition to forestry and basic finance.

1. Understand taxes. You can make a lot of money and lose a lot of money based on what you know or don’t know about timber taxes. Taxes matter. For example, tax laws encourage ownership changes. Issues associated with tax efficiency facilitated the movement of timberlands to institutional investors, Real Estate Investment Trusts (REITs) or subchapter S Corporations.
2. Understand financial statements. They are the language of investors and executives. At the end of the day, the results of managerial business and capital allocation decisions get translated through audited financial statements which, like haikus and box scores, require interpretation and translation.
3. Understand ownership structures. At a minimum, be able to explain a C Corporation vs. a REIT vs. the range of other single-tax entities (LLC, S Corporation…)
4. Understand true risks (and accounting for them). Newspaper headlines report on fire, bugs, and hurricanes. Forest investment professionals can help them put these into perspective and understand more about markets. Part of getting comfortable with timberland risk results from being familiar with available information on physical, operational, financial, and regulatory risks. Forest analysts should be prepared to think about and answer “how should we think about timberland risks?”
5. Understand markets and forestry data. Know current prices and industry trends. Wood prices provide a key signal in understanding the economics of a given wood basket today and historically in an easily communicated form. Be familiar with indices and data sources such as NCREIF, the FTR Index, and the US Forest Service. Remember, all forestry data is a sample…
6. Understand how to communicate with a range of individuals. In person and in writing. Forestry and investment analysts communicate with a broad range of groups and individuals, including researchers, clients, private consultants, executives, our bosses and colleagues. Analysis has little value if it cannot be communicated easily, either by us or by others, as part of a presentation or in writing.