VARDAMAN VIRTUAL FORESTRY COMPANY

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

WHAT IT TAKES TO TURN A PINE PLANTATION INTO A FIRST-RATE INVESTMENT

In this and many previous issues, we've written a lot about how many factors must be considered and how carefully each operation must be executed to convert a cultivated field or a cutover into a modern plantation. If you own the land and are converting it for your own purposes, we've probably said enough. But if you are a potential investor in pine plantations or if you want to know how such an investor looks at your plantation, we've told only half the tale. Here's the other half, a step-by-step description of how we turn plantations into PPICs for serious investors seeking nothing but a suitable return on capital (IRR).

1. Management Plan

Our forester tests many alternatives and selects the most profitable. The Management Plan describes in detail the soils under the plantation, the nature of the site-preparation, the characteristics of the seedlings, the date, spacing, and method of planting, future cultural practices, timing and severity of thinning, and date of harvest.

2. Prediction of Timber Yields

The prediction starts with a list of per-acre inputs for our computerized growth-and-yield program. Its outputs consist of tables showing number of trees in one-inch DBH classes prior to thinning, in the thinning, after thinning, and in the harvest. Finally, all predicted stands are evaluated using data from current sealed-bid timber sales.

3. Calculation of IRR Based on Costs and Timber-sale Proceeds

We estimate costs expected during the life of the plantation: regeneration, management, annual field inspections and reports, financial reports, and timber-selling expenses. Then we schedule all plus and minus cash flows and calculate IRR.

4. Map of Plantation and Road Map for Locating It

We prepare a map of the plantation (often at 1" = 1000') and the tract it is part of, using GPS or recent aerial photos. We also prepare a road map so that anyone can locate the plantation.

5. Inspection Reports

As soon as weeds and grass on the site turn brown in the fall after planting, we check survival and report on it. Near the end of each year thereafter, we inspect the plantation and report on conditions in it by videotape and letter.

We strongly recommend that these first five steps be carried out for all plantations, even those installed on your own land for your own purposes. We've learned during more than 45 years how valuable these records can be. The other steps described below are needed only for PPICs.

6. Contract with Landowner

The PPIC contract runs to 10 pages and is part of the file on each one.

7. Calculation of IRR for Groups of Plantations

"Don't put all your eggs in one basket" is the main guiding principle for investors in pine plantations. During the passage of 14 to 24 years, all kinds of bad things can happen to the trees on one small area. Many people recognize the risk of possible total loss from insects, fire, and windstorm. Few recognize the risk of loss from low prices in the scheduled year of harvest, and this may be quite large.

This being the case, investors must have a group of plantations, and the larger the group and the wider the area it's spread over, the better. Because geographical diversification reduces risks, these investors will accept lower IRRs and therefore make larger annual payments.

Because of this, we must provide a means by which the investor can calculate IRR for a single plantation or any combination of them. We do this by storing all data for all plantations in our computer, which is accessible to the investor at all times, so the investor can play what-if games to evaluate future possibilities of any sort.

8. Calculation of Buy-back Price

Each PPIC can be bought back by the landowner at any time by paying for all our outlays plus interest according to a formula set forth in the contract. We record each item of expense by date for each PPIC and use a computer program to calculate the buy-back price at a moment's notice. No landowner has access to this computer, but if he will call our office, we'll print out the calculation and send it to him by whatever means he chooses.

Summary

As you can see, each PPIC must undergo lots of painstaking processing before it is suitable for a group, and a typical group contains 100-150 PPICs. The group is not ready for investors until the last entry has been made for the last PPIC. Consequently, delays in closing these transactions causes a large and expensive back-up of our office work, so we attach deadlines to our offers and the receipt of signed contracts. We aren't giving you the rush act for the fun of it; we're merely trying to cut our costs so that we can offer you more money.