How do you profitably invest in a sustainably harvested forest while directing efforts toward clean water protection, flood control, habitat for fish and wildlife, soil building and carbon storage?
Industrial timberland is managed solely for the wood in the trees, but Ecotrust Forest Management, based in Portland, Ore., invests by putting its focus on entire forest ecosystems. It's creating markets around forest diversity by selectively harvesting trees rather than clear-cutting, and also selling everything from carbon credits and development rights to edibles such as honey or salal for floral bouquets.
This diversified approach to managing a forest renders the land more resilient, both ecologically and economically, said Ecotrust CEO Bettina von Hagen.
Since its inception in late 2004, Ecotrust Forest Fund I, with $30 million under management, had average gross returns per year through December 2012 of 10.6 percent compared to 8.17 percent during the same timeframe for the NCREIF Timberland Index. It won't update returns because it will be reopening the fund to investors in the next three to six months. The fee is 1.25 percent.
Ecotrust has raised $60 million for a second fund, which closed in December. It currently has 30,000 acres under management.
And in late May, Ecotrust closed its first property sale to the Coquille Tribe in coastal Oregon, allowing the tribe to repatriate a piece of its ancestral homeland.
Investors include the Packard Foundation and Patagonia Inc. founder Yvon Chouinard, and the Russell Family Foundation (TRFF) has invested as part of its reinvestment strategy after divesting from coal.
"Our trustees wanted to accelerate movement toward the new sustainable investments and bring that market to scale," said TRFF CEO Richard Woo. "In many ways, it's reinvesting in an old technology: forests, which really have an impact on the current conditions of climate and resilience.”
Forest economics revolves around that fact that, as trees grow, their financial value also grows. A tree grows fastest in its teenage years and, after it reaches maturity, both its physical growth and financial value grow at a slower rate. It's a classic S-curve. Traditional investors seeking to maximize short-term gain harvest trees at the end of that growth spurt, wiping out their balance sheet every 35 to 40 years, when they extract 100% of a plantation's trees during a clear-cut.
But in the Pacific Northwest, a habitat for prized tree species such as red cedars, redwood and spruce, this type of short-term strategy literally misses the forest for the trees. These trees have been cut and turned into Douglas fir plantations to produce 2×4's to compete with pine plantations in the south that will always be the low-cost producer.
"Differentiation is the core fundamental process behind ecological and economic development," said Ecotrust Chairman Spencer Beebe, who contends the region should stick to producing high-quality wood and wood products. "Why are we degrading our competitive advantage in order to compete where we will lose?"
In the Pacific Northwest, von Hagen said, a mature forest of 60-80 years has double the stocking rate of one that has just finished its teenage growth spurt. The value of the wood in these larger trees at harvest can also be up to 50 percent higher than the teenage version.
Rather than clear-cut, EFM maintains a continuous forest cover while harvesting regularly, with the aim of keeping the trees for 60 to 80 years or, in some cases, leaving the forest to live forever. To ensure that the diameter of the trees can continue to grow, it engages in several light thinnings. The idea is to maintain a natural mix of species and ages and to produce a range of log sizes. Since 2004, the funds have sold eight million board feet of wood.
EFM reduces capital expenditures by relying more, though not exclusively, on natural regeneration. While von Hagen says it will ultimately be cheaper per volume of wood to extract fewer large trees instead of multiple smaller ones, Ecotrust's harvesting costs are currently higher due to the precautions it takes to protect the forest when it fells a tree.
How else does Ecotrust boost income while waiting for the forest's balance sheet to grow? It begins by purchasing young forests or those that need rehabilitation—woodlands that are less desirable to traditional timberland operators, who generally seek quicker returns on merchantable timber. In addition, it looks for land in areas that the government designates as low-income communities or in areas that, say, are in the last remaining part of an ecological watershed. These characteristics can bring advantageous financing.
For example, all four of Ecotrust's properties in its first fund were financed using federal New Markets tax credits designed to spur investment in distressed communities. (About half the forestland in Oregon and Washington qualifies, von Hagen says.) Although the mechanics are complex, the bottom line is that the tax credits allow purchasers to reduce their basis in property acquisitions by 20 percent to 25 percent. The credits were the largest revenue producer in the first fund's financial results. Through 2012, they accounted for 4.4 percent of the fund's 10.6 percent internal rate of return.
The funds gets paid for protecting wildlife habitat and recreational land by selling development rights in the form of conservation easements to land trusts and government agencies. These range from 20 percent to 50 percent of the land's appraised value. Fund I has raised $356,000 for such conservation activities—about 1.2 percent of the $30 million under management.
Ecotrust's strategy involves analyzing each cluster of trees in its portfolio and how it can best extract value Are the trees near a river, where they have greater value maintaining salmon habitat and selling conservation easements? Or is it close to a logging road, where it may be optimized for timber production? If it's on a steep slope, where it's hard to extract the timber, or if it's far from a logging road, where the cost of timber extraction is high, the best option for those trees may be producing high-quality carbon. In March, Ecotrust closed a $500,000 carbon-credit sale to Chevrolet from its woods, an amount equivalent to 1.7 percent of funds under management.
"If you only have a timber hat on, you are going to cut that [timber] whether it produces a high or low value for you because it's the only tool you have," von Hagen said.
Fund I is an evergreen fund, meaning there is no term limit and investors can enter and exit when they want. As a structure that "matches the life of the forest," von Hagen said, the fund’s greater flexibility means there is less worry about the timing of a property purchase and whether its value can be realized by the end of a term. Also, there is an opportunity to engage in beneficial environmental techniques such thinning, tree improvement or even inoculating trees with truffles—things that may not bear fruit in the short term.
This year, Ecotrust introduced beekeeping to one of its forests, which, besides enhancing wild edibles and medicinal plants via pollination, will produce honey from the huckleberries and salmonberries characteristic of a young forest. Von Hagen is considering commercial strategies for mushrooms, including harvesting and marketing under Ecotrust's own label. And the fund is making an inventory of the edible plants in the forest, which include fiddlehead ferns, miner's lettuce and fir and spruce tips.
"We are collaborating with chefs," she says.
As part of Fund I, where the land is generally meant to be kept after it is purchased, Ecotrust's sale of the Sixes River Forest to the Coquilles (re-named Sek-wet-se by the tribe) was unusual. Soon after purchasing it in 2006, von Hagen reached out to the tribe to establish a relationship and explore potential collaborations around research or cultural harvesting. When the tribe let her know two years ago that it wanted to purchase this small portion of their ancestral homeland, she felt motivated to help them find federal and state New Market tax credits that allowed the fund to sell the property at market rate at the same time that it cut the tribe's cost basis by about 35 percent.
"The tribe shares our ecological goals," she said—something that was and is evident in their superb management of another forest. "It brought the property a whole level of cultural significance, and they were adding value we could not."
The tribe, meanwhile, is excited. "I don't think this could have happened without Ecotrust's support," said Brenda Meade, chairman of the Coquille Indian Tribe. "We're looking forward to hosting a blessing ceremony for this land."
