VARDAMAN VIRTUAL FORESTRY COMPANY

The Most Direct Link to Knowledge Workers in the Southeast Forest Economy

RETURN-ON-INVESTMENT EXPERT DISCUSSES TIMBERLAND

After graduating from the Harvard Business School, Dan W. Hopkins spent 17 years in banking in Atlanta and Nashville and eventually becoming president of Commerce Union Bank in Chattanooga. He spent the next 17 years in real estate development from his headquarters in St. Simons Island, Georgia. All this time he was a successful investor in timberland. Since all these fields require analysis of investments, we wanted to know what he thought about timberland, and here's what we learned:

JMV:	Tell us how you became interested in timberland and where your holdings are located.
DWH:	Primarily because I was born into it. Holt Walton of Cordele, Georgia, my mother's brother, was a pioneer timberman who leased a large area of his land to the U. S. Forest Service for an experimental forest about 50 years ago. I worked for the Forest Service during summers as a teenager, and I went through forest ranger school one summer while I was at Emory University. I inherited my uncle's land in Georgia and Alabama, some of which was leased to a major company for 60 years, and I own or manage other lands near these tracts.
JMV:	How do you decide when and how to sell timber?
DWH:	I try never to sell timber when I want to or have to. I try to sell timber only when someone else wants to buy it and I perceive that the market is historically high. I think that timing of the sale is one of the biggest control factors that a landowner has over timberland investment. I get some market data because you and some of your competitors are nice enough to send me your newsletters. I also talk to local buyers, some of whom are lifelong friends, in areas where I own land. What the over-all economy is doing, particularly the housing sector, gives me another clue. I am amazed at the fact that stumpage prices have held up as well as they have this year considering what happened to housing; I expected a much larger decline. All these factors go into my appraisal of the market. But to repeat, I think that the most important thing is not to sell when you want or need to sell, but to sell only when buyers want to buy at historically high prices. I agree with your constant recommendations of sealed-bid, lump-sum sales. I think that is the best way to go.
JMV:	How do you evaluate tracts of land that might be purchased? If you predict future yields and then discount them to the present, what discount rate do you use?
DWH:	The discount rate to use was a hot item when I was at Harvard, and I have used the concept in comparing alternative investments. I recognize that you and others who recommend the use of a discount rate to determine Bare Land Value are merely trying to give proper weights to all the complex factors that affect the investment. On the basis of my analysis and experience in the areas where I buy timberland, I know that I can pay $250 to $350 per acre for land on which to grow pine trees. And I'm talking about just the dirt. I like to apply the answers that I get from cash-flow analysis to what I call decisions under uncertainty and do a probability analysis with some of those answers. What if we change cutting plans? What if the price of sawtimber rises 20% or income taxes rise 25%? The factors that have made money for me and my family in the past have not been the price paid for bare land, but those outside our control, such as inflation, premium prices for various forest products at different times, and changes to higher uses. You can't predict these; as I said, you just have to sell when the good chances come.
JMV:	And the discount rate to use?
DWH:	30-year government bonds are now selling to yield 8.2%; not many years ago, they were selling to yield 15.2%. How can you predict when and why such changes will occur? To me, the appropriate discount rate is a very personal thing. It's like talking to a man about his bank balance or his income. Each person has to choose the rate himself on the basis of his personal situation and not on what the market seems to show. I don't think that it is appropriate for me to suggest one.
JMV:	Do you think that future values of timber or timberland will be affected by shortages?
DWH:	I don't think that there will be any shortages of timber or timberland. Land is still reverting to timber from other uses, and we are finding ways to grow more and more timber per acre and to produce more and more products from logs of the same size. These trends will continue. On the other hand, there will always be spot shortages of special forest products or timber that can be logged in bad weather, but these will be only temporary selling opportunities.
JMV:	In your management, do you utilize plantations or natural stands: If the latter, what specifications do you use in regeneration?
DWH:	I use planted stands. Over here we have grown up with planted stands; one of the oldest plantations in Georgia was established by my family in 1926. One reason is that I want to reduce the impact of any mistakes that happen. I have embraced your 1990 Hypothesis as the way to regenerate. It gets the crop off to a fast start, so if something goes wrong, I can wipe it all out and start over. Another reason is that I want to reduce the amount of management, my input, required to grow a crop. If everything goes right, and it should because you spend lots of money and try hard to be correct, your management plan is pretty well set in the beginning. You don't have to spend lots of time trying to decide when and where to thin, harvest, or do TSI work and then lots of money carrying out your decisions. I think that, in the future, the cost of management will become more and more important.
JMV:	Are revenues from hunting, fishing, or recreation important factors?
DWH:	These items will become a much larger percentage of the revenue from timberland, and I'm working on increasing them on my own land. The problems I see are conflicts with timber-growing (fires set by careless persons on the land for other purposes or damages from use of all-terrain vehicles) and the liability that I am exposed to. But I think that these increases are just getting started, that people will pay a lot more for such items.
JMV:	Do you give much weight to ad valorem and income taxes?
DWH:	Yes, I do. I was very concerned about the former situation in Georgia. Most authorities setting ad valorem taxes have nothing on their minds except the need for more money to satisfy their citizens' desires, and these needs will continually increase. Ad valorem taxes can tax you out of business, and this is particularly true in my situation. Most of my land is bisected by state highways or near interstates and urban areas. The tax assessor could say that they could be used for mini-farms, etc. and set the values and therefore the taxes far higher than could be supported by timber incomes. I needed some protection from this, and I got it when the Georgia Legislature established conservation use values for timberland and a new method of taxing timber to implement Constitutional Amendment 3 approved by our voters in November 1990. I'm less concerned about income taxes. I think the days of capital-gains taxes might be gone forever; they seem to give, but don't give, too much to the "rich". Income taxes for individuals are now at the lowest level in my lifetime. I can remember when the marginal tax rate was 92%; now it is in the low 30's. I don't complain about that; I'm just proud it's that low. We could easily see 50% tax rates again, and that's the rate I often use when I make investment analyses.
JMV:	Are there any points that I should have asked you about?
DWH:	Yes, two. One is that I would like for you to change your DBH measurements from two-inch classes to one-inch classes. I need this to make a better analysis of what my trees are worth. Two is wetlands. The classification of wetlands by the federal government could have a big effect on timber growers because trees grow best where they have plenty of water and operations on some lands with plenty of water might be restricted. The classification system is something that we should learn about.
JMV:	You are exactly right about one-inch DBH classes. All the growth-and-yield models that we know anything about use them for the reason that you mentioned. We do the same when greater accuracy is needed, such as determining when a high-grade hardwood log first qualifies as large enough for veneer. We think that, eventually, everyone will use them. We now use two-inch classes in most of our work because timer buyers prefer them. We determined this by a survey in which all 20 of our managers polled the five most active buyers in their areas; more than 95% of these buyers use two-inch classes and have learned by long experience what adjustments must be made under this practice. Since we want to get the highest prices in sales for clients, we offer timber for sale in the manner that buyers like best.