Timber in transition: Booming values shift Plum Creek from logging to real estate (complete article from source)
Source: missoulian.com, by MICHAEL JAMISON of the Missoulian
February 05, 2007
KALISPELL - Used to be, the Kalispell Chamber of Commerce would get together once a year for a field trip into the woods.
They called them “timber tours,” and according to chamber president Joe Unterreiner, “early on, these actually were timber tours.”
But those were the days when the business of timber was the business of western Montana.
Times have changed.
On a soggy afternoon last fall, Unterreiner arrived on forestland owned by Plum Creek Timber Co. for a very different sort of tour.
He called it “timber lite,” adding that today's Chamber of Commerce field trips emphasize “the changing economics of what's happening with timberlands.”
Montana has been discovered, he said, its real estate is commanding premium prices, and companies such as Plum Creek are realizing their trees are worth more vertical than horizontal.
So they're selling off big chunks of land to developers - and developing other pieces on their own.
Mark Boardman is a forester with another local timber company; he arrived home from a two-year hitch in Iraq just in time for last year's timber tour.
“Everything changed” while he was overseas, Boardman said. “To me, it seems like a huge change.”
Instead of standing amid a logging operation, Boardman and Unterreiner were standing in Meadowbrooke, Plum Creek's first attempt at developing its own subdivision.
Are there any similarities between this site and the working forest Boardman knew before heading to Iraq? “Well, they're still Plum Creek lands. At least for a little while longer.”
That Plum Creek is divesting some lands - calling them “higher and better use” lands, or HBUs - is no secret. The company has even spun off a new subsidiary, Plum Creek Land Co., to broker the real estate deals.
“Our business model has changed greatly over the last few years,” said company spokeswoman Kathy Budinick. “We've moved from being solely a timber company to something much more complex.”
The creation of Plum Creek Land Co., she said, surely signaled a shift toward real estate sales as a bigger contributor to the corporate bottom line.
“It's a real business opportunity beyond forestry,” she said.
These are, after all, private lands, and can be logged or developed as the owners see fit.
Company policy is clear: “We work to capture the most value from every acre that we own. This means continually assessing the value of the trees growing on the land, the value of the natural resources that reside below the surface, and the value of the land itself. ... Over time, our strategy is to sell the non-core timberlands and reinvest the proceeds from these sales in other, more highly productive timberlands that add to our timber inventory, harvest and cash flow.”
Put simply, in the words of company president and CEO Rick Holley, “people are going to come to us, and they're going to want to buy land.”
A few weeks after Unterreiner and Boardman visited Plum Creek's subdivision west of Kalispell, another group came field-tripping through. It was an investor tour, led by research analysts from Deutsche Bank Securities Inc.
“We saw an internally developed community called Meadowbrooke, which is almost sold out much faster than expected,” they reported, adding that “the market for luxury mountain developments is not confined to famous places like Aspen and Jackson Hole.”
Plum Creek, the investment analysts said, has about a quarter-million acres targeted for residential real estate development nationwide. Include the 975,000 acres of company lands to be sold for recreation, as well as the 500,000 acres to be sold for conservation, and about 1.7 million acres are on the block. Another half-million acres of “non-strategic” timberlands are under review for possible sale.
In 2004, Plum Creek reported the sale of 375,000 acres for $300 million. In 2005, 232,000 acres sold for $292 million. That same year, the company's own in-house development arm obtained permits for 926 rural residential lots on nine properties, with 19 more projects in the works. At the same time, Plum Creek reported entering joint ventures with real estate developers in Florida and Georgia.
Although real estate sales remain a relatively small percentage of corporate revenue, they represent a substantial chunk of Plum Creek profit - approaching 50 percent of all company profits in some years.
That's a lot. The investor analysts touring Meadowbrooke estimated Plum Creek would realize profits of nearly $21,000 an acre at the proposed Black Hawk subdivision, which is planned on 467 acres near Swan Lake.
The company's real estate income has skyrocketed in recent years, and for 2006, according to Plum Creek filings, real estate revenues totaled some $308 million, with 111,575 acres sold.
Following their tour, the Deutsche Bank analysts gave Plum Creek a “buy” rating, predicting total returns of more than 10 percent during the coming year.
That income will largely result from what Plum Creek's Tom Ray calls the recent “up-tick in private sales. Some lands just have more value as developments.”
And although Ray insists “our core business is owning timberlands,” he admits “development will certainly be important, too, as the company moves forward.”
Question is, what will that development cost Plum Creek's neighbors?
Pat O'Herren is mapping part of that cost from his office in Missoula, where he's a planner with Missoula County's Rural Initiatives program.
“We're certainly aware of that apparent shift in their land management strategy,” he said, “and we are definitely concerned.”
He's worried because Missoula County has almost no control over how Plum Creek will develop its land. The county, O'Herren said, is split into nine planning regions. If any single landowner owns more than half the private acreage in any given region, that landowner can protest and quash any attempt at planning and zoning there.
And of Missoula County's nine planning regions, Plum Creek owns a majority property share in six. Countywide, the company owns 413,992 acres.
“That pretty much makes Missoula County a company county,” O'Herren said. “We're not talking about company towns anymore; we're talking about company counties. There's a lot at stake here.”
Especially if Plum Creek decides to fight county zoning efforts. A Seattle-based corporation, O'Herren said, whose connection to Montana is only as strong as the value of the land, can - and likely will - define the community landscape for all the rest of the residents.
“They've been very blunt,” O'Herren said. “If they don't agree with the county zoning, they will protest it.”
It's not as if Plum Creek is blind to the importance of zoning as a way to protect property values and a way of life. In fact, at Meadowbrooke - where Plum Creek intends to sell nearly 60 home sites on slightly more than 500 acres - the company has put a whole laundry list of conditions on what homeowners can and cannot do with their property.
The covenants include a ban on cutting big, old trees.
Beyond its own internal subdivision rules, though, the company has shown no interest in broader community planning efforts, O'Herren said.
“Quite honestly, that leaves us only one tool,” he said, “emergency, or provisionary, zoning.”
And that's exactly what Missoula County commissioners are considering for the Seeley Lake area, where Plum Creek owns a whopping 81 percent of all private land, or 82,786 acres. Company representatives have told O'Herren they plan to develop much of that acreage, “and that's certainly going to change the character of Seeley Lake.”
It's also going to impact the Missoula County budget. Already, two rural landscape scientists have been hired to deal with rural development issues, including development on Plum Creek lands. O'Herren expects to hire one more full-time planner next summer, which will increase his staff from fewer than three to about eight in a short year and a half.
That will cost taxpayers, O'Herren said, as will the development itself.
“The property taxes from that type of forestland development come nowhere close to paying for the infrastructure needed,” he said. “From our perspective (as county planners), the big concern is how do you provide services to remote locations? It becomes a nightmare - an expensive nightmare - in terms of infrastructure.”
Others are worried about impacts on county road budgets, school budgets, emergency response budgets. Then there are firefighting budgets, both wildland and residential, not to mention impacts to wildlife, to watersheds, to the timber industry itself. Others are concerned about traffic, about access, about hunting and fishing and a whole way of life.
Which is exactly why Missoula County is considering emergency zoning in Seeley Lake. It would only last a year, two at the most, but perhaps that's a sufficient window for negotiation.
Currently, O'Herren is awaiting a neighborhood land-use plan, due for release Feb. 12, but still suspects emergency zoning will be required.
“We're willing to talk,” said company spokesperson Kathy Budinick. “We want to be involved with the communities.”
That's good news for O'Herren, but does not slow the county's push for emergency zoning.
“We're seeing significant change in a hurry,” he said, “and we need some breathing space to deal with that.”
No one denies Plum Creek's ownership of 1.3 million acres in Montana, and more than 8 million acres nationwide. And no one denies Plum Creek the right to do as it pleases with that land, within the constraints of law, to maximize profits for shareholders.
But there will be impacts, for the company's neighbors and Montana taxpayers.
“These kinds of concerns are on our radar,” Budinick said. “But that doesn't mean that we're going to stop selling land or stop developing land. What it means is that we're willing to engage with stakeholders about the impacts.”
And so the real questions are for those neighbors, not for Plum Creek.
What will they do?
“That's a very big question,” said Melanie Parker, an educator and community organizer living in northwestern Montana's Swan Valley. “It's an interesting debacle.”
Until now, she said, Plum Creek's land sales have trickled through her valley, giving locals the time to drum up money to buy them out.
Much of the cash for those deals has come from the federal Land and Water Conservation Fund, a pot of royalties from off-shore oil and gas drilling intended to mitigate environmental impacts of that work by buying up habitat elsewhere.
And although the fund is flush amid high energy prices, it's being tapped for other national priorities. No one expects the LWCF to finance continued purchases of Plum Creek land, and no alternative cash source has been identified.
“We're right on the edge of some cataclysmic changes here,” Parker said. “The big story in the Swan is that Plum Creek announced it was going to divest 20,000 of its 80,000 acres, a quarter of their holdings in the valley.”
The Trust for Public Land used LWCF money to buy 9,100 of those acres, then gave the land to the U.S. Forest Service. Another 3,560 acres already have been sold to developers. And development rights have been sold on most of the remaining 7,400 or so acres.
In addition, The Trust for Public Land was able to purchase development rights on 10,000 acres not included in Plum Creek's initial announcement of intent to sell.
“But there's still 62,000 acres in the Swan hanging in the balance,” Parker said, “with no clear plan.”
The conservation buy-out model is further being eroded by the fact that Plum Creek is now in the business of not only selling land, but also developing land. Anyone hoping to purchase their way out of development will have to pay not only for the land, but also for the profit potential of that land once developed.
Plum Creek calls the remaining 62,000 Swan Valley acres “core timberlands,” yet Parker remains suspicious of the company's long-term commitment and wonders, “If they're core timberlands, how can we keep them that way? What's at stake here is the Crown of the Continent ecosystem.”
Bob Harrington is a forester, the top forester in fact, for the state of Montana. He's been watching Plum Creek sell its lands, and like others, he's worried.
“They are a corporation,” Harrington said, “and they're out to make money. I, for one, am not going to begrudge them that.”
But neither is he naïve enough to believe there will be no fallout.
During the wildfire season of 2006, he said, cash spent from the state general fund to fight fire totaled about $40 million. Most of that was spent battling blazes in the “wildland-urban interface,” where rural homes tuck into forest hillsides.
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