31 Inverness Center Parkway
Birmingham, AL 35242
Phone: (800) 995-9516
Fax: (205) 991-2807
We take a comprehensive approach to risk management and seek to identify, assess and mitigate investment risks -- some common to all investments and some unique to timberlands-- throughout the investment cycle. We view timberland investment risk as falling into the following categories and apply a number of mitigation strategies …
Timberland Investment Risk
|Risk Component||Definition||Mitigation Strategy|
|Production Risk||Unforeseen volume and quality losses caused by natural events and inaccuracies in timber volume and quality projections.|
|Market Risk||Uncertainties in future prices for timber products.|
|Liquidity Risk||Risk associated with disposition of the properties at the close of the investment period.|
|Regulatory Risk||Risk associated with state and federal laws that may affect timber harvesting or other forest management practices.|
Our risk mitigation strategy has three major components:
The simple act of developing a timberland portfolio with properties in multiple geographic regions and market areas provides a great deal of protection against the major timberland investment risks.
- The modest risk of natural hazards is well mitigated through diversification. Insects, fire, hurricanes and ice storms comprise the primary damaging agents to southern timberlands. While each of these events can cause significant damage, fortunately impacts are localized and minimal over a large acreage.
- More diverse markets mean less price risk. Local markets vary widely in the depth and breadth of the manufacturing base. Forestland located in areas with multiple mills not only reaps the pricing benefits of greater competition, they also lessen the impact of losing a single mill.
- We reduce risk by managing stands to produce a variety of products. Certain management regimes can lock the owner into a certain product strategy. As a general rule, RMS manages timberland assets in such a way as to produce multiple products through the life of each timber stand.
- Diversification lessens liquidity risk. By geographically diversifying timberland properties, market downturns might affect the sale of one or more properties but are not likely to affect all properties under ownership.
It is a well-known fact that managed forests experience much lower losses to wildfire and other damaging agents. Less known is the fact that active management can greatly reduce the other material risks associated with a timberland investment.
- The best insurance against losses due to natural hazards is through active forest management. Practices that maintain a healthy forest, provide access for event response teams, manage understory fuel loads, and support surveillance and detection efforts greatly reduce the underlying risk of natural hazard losses. Over the last 15 years, RMS-managed lands in the South experienced average annual casualty losses of less than 5 basis points.
- We use the inherent qualities of timber to mitigate price risk. Unlike other agricultural commodities, timber can be warehoused at little or no cost. During cyclical down markets or short-term market disruptions, trees are stored on the stump until prices improve.We develop and implement property-specific timber marketing plans, utilize multi-year timber supply agreements, adapt management to changing market trends and build preferred seller status with local mills to reduce price volatility.
- Professional management can improve the liquidity of a timberland asset over a 15-year time frame by increasing timberland productivity, reducing purchaser uncertainty at exit and through the practice of high levels of environmental stewardship.
- Our knowledge and reputation as professional asset managers decrease environmental and regulatory risk. As an experienced timberland manager, we have management systems in place to address environmental regulations and long-standing, positive relationships with the regulatory and conservation communities that facilitate a proactive, solution-oriented approach to resolving environmental problems.
Incorporating Risk at Acquisition
Managing investment risk begins before the asset is purchased. Every timberland property is unique and we assess and adjust for risk on each acquisition we evaluate.
- We conduct a detailed evaluation of the "riskiness" of each potential acquisition. This evaluation combines a comprehensive office and field evaluation of property information to identify potential investment risks. The risk assessment also includes a formal third-party analysis, by legal and environmental experts, of a wide range of issues that are found with timberland assets. While most timberland risks can be described as an "inch deep and a mile wide,” some can be characterized as "an inch wide and a mile deep.” We depend on thorough underwriting procedures to identify the latter, if present, and avoid them before an asset is purchased.
- We also incorporate risk into our asset pricing. After completing the initial risk assessment, we evaluate how the specific property rates in each of the major risk categories against the appropriate timberland benchmark asset and incorporate these findings into our determination of the risk-adjusted discount rate.