This document summarizes key factors that affect timberland valuation, focusing on the western U.S. from 2008-2011. It discusses how timberland values have held up compared to other assets during the recession due to factors like deferred harvesting, export markets, and reduced costs. The discount rate, log price projections, timber yields, and production costs have the biggest impact on discounted cash flow valuations used to appraise timberland. High quality appraisals rely on supportable assumptions for these factors.

1. The Discount Rate and Other Factors That Affect Timberland Value Roger Lord Mason, Bruce & Girard www.MasonBruce.com Presented at Who Will Own the Forest 7 Sept. 20, 2011 Portland, Oregon

2. Questions Why have timberland values held up so well compared to other asset classes during “The Great Recession”? How do I know if my asset valuation is credible? 2

3. Outline What drives changes in appraisal values, focusing on key factors affecting Income Approach Focus is on western U.S. timberlands, 2008-2011 3

4. Westside Timberland Sales Adjusted for inflation 4

5. A Closer Look 5

6. Take Away Message You can’t reliably draw conclusions about timberland value trends simply by looking at transactions Too few transactions Too much variation between properties 6 So, how have timberland asset values changed?

7. Approaches to Value Appraisers rely on 3 approaches to value Cost Approach Sales Comparison Approach Income Approach 7

8. Income Approach Discounted Cash Flow analysis Projected income stream and a reversion Key elements: Timber growth & yield Projected product prices Projected harvest volume Management costs Discount rate Which are most important? 8

9. Key Factors Affecting DCF Valuations NPV is most sensitive to: Log price projections Discount rate Near-term timber yields Production costs 9

10. Key Factors Affecting DCF Valuations Results tend to be similar across different properties within same region Sensitivity would vary by region 10

11. Log Price Projections Log prices depend on end-use demand Analyze housing starts and other forecasts Discuss expectations with market participants When will the housing market recover? What else will change? Unforeseen events 2010: inventory issues 2011: log exports 11

12. Forecasting & Moving Targets Recovery to > 1.5 MM units has been 3 to 4 years away… …for the last 4 years. 12

13. Log Price Projections At current discount rates, cash flows in the first 5 years represent 15-30% of the NPV Effect of short-term log market fluctuations are muted by long-term nature of DCF valuation Especially because deferred harvest volume can be stored on stump and will continue to grow 13

14. Discount Rate Discount Rate Data Sources Extract from transactions Market interviews Cap/Yield rates in other real estate sectors Built-up rates Weighted Cost of Capital Source: RISI Timberland Market Report 14

15. Discount Rate Difficult to reliably extract discount rates from transactions Discount rates & log price projections are linked High rates coupled with aggressive price scenarios Low rates more conservative pricing, lower risk 15

16. Discount Rate Sensitivity to D.R. change varies from property to property Depends on profile of income stream over time More impact on young forests with back-loaded income stream 16

17. Discount Rate 4 example properties Raising rate from 5.0% to 6.25% reduces value by 13 to 21% $264 to $881/ac Keeping all else constant 17 But “all else” never stays constant!

18. Observations 2008 - 2011 Managers have acted to protect value Deferred harvest Timed harvests to seasonal market peaks Pursued export markets Shifted species mix where possible Cut costs to preserve margins Logging costs down by 15-20% Haul costs down by 5-10% Likely to be temporary 18

19. Deferred Harvest Oregon industry harvest dropped 24% in 2009 2009 harvest down 33% from 2003-07 average Accumulated deferral since 2008 = 70% of previous 5-yr harvest 19 1.9 BBF Oregon Dept. of Forestry data

20. Deferred Harvest Washington private harvest dropped more dramatically 2009 harvest down 47% from 2003-07 average Accumulated deferral since 2008 = 101% of previous 5-yr harvest 20 2.4 BBF Washington Dept of Revenue data

21. Timing Harvests Managers preserving margins by selling more volume into spring price surges 2009 caused by supply chain imbalance 2010 caused by export surge 21 Doug-fir Whitewoods

22. Export Markets 22 Log Export Facilities

23. Production Cost Management Increase bid-based contracting of logging and trucking Focus harvests on lower cost tracts Reduce road costs Reduce silviculture and admin expenses 23

24. Take Away Message Negative Factors Increased discount rate Decreased short to medium term domestic log prices Reduced HBU and auxiliary income Positive Factors Delayed harvest adds capital appreciation Timing harvests to market spikes Increased export Reduced logging & hauling costs Increased pulpwood income 24

26. Is Your Asset Valuation Accurate? What can you look for to judge the quality of your timberland appraisals? 26

27. Appraiser Selection Best Practice Third-party, independent general certified appraiser Qualified and experienced in timberland asset Properly supported opinion Developed with generally accepted valuation principles and standards Appraiser rotation Watch out for Over-reliance on internal valuations (see GIPS & REIS standards) Conflicts of interest Lack of timberland expertise Lack of geographic expertise 27

28. GIPS / REIS REIS – Real Estate Information Standards GIPS – Global Investment Performance Standards Increasing transparency of real estate industry Annual external appraisals, unless stipulated otherwise by client agreement (after 1/1/12) Externals must be performed by an independent external professionally designated, certified, or licensed commercial property appraiser Recommend appraiser be rotated every 3-5 yrs 28

29. Discount Rate Best Practice Rate supported by market evidence Transactions Market participant surveys Other disclosed evidence Watch out for Unsupported rate assumption Rate not adjusted to property-specific risk factors 29

30. Log Price Projections Best Practice Projections supported by Macro-economic analysis Property-specific history Reasoned logic Log grade or product specific prices Watch out for Unsupported price assumptions Over-reliance on trend prices Long-term price appreciation not supported by history and/or an economic rationale 30

31. Growth & Harvest Projections Best Practice Use of property inventory data Projected with accepted growth models calibrated to local conditions Correct species mix and log product distributions Merchandized to market specifications Watch out for Use of regional yield curves or growth percentages Initial inventory that doesn’t match property Lack of log grades or size classes (PNW) 31

32. Costs Best Practice Consideration of property-specific cost history as well as local market region averages Watch out for Unsupported cost assumptions Incomplete cost structure 32

33. About Mason, Bruce & Girard Full service natural resource consulting firm Forestry Services Forest management responsibility on 300,000 acres Inventory & Biometrics Planning & Economics Appraisal & Valuation Services Environmental Services Geospatial Services Appraisal & Valuation Over the last five years, MB&G has appraised 5.0 million acres of timberland valued at nearly $15 billion Other valuation services include: Acquisition/Divestiture Due diligence Conservation easements Litigation Support & Expert Witness www.MasonBruce.com 33

34. About Mason, Bruce & Girard MB&G began as a forestry consulting business in 1921 under David Mason. Mason began his first forestry consulting firm soon after the 1920 publication of his research on the timber industry and lumber production in the Pacific Northwest. As a result of his efforts to move the timber industry toward a more professional and sustainable approach to forestry, he became widely known as one of the nation’s first leading advocates of sustained yield forest management. In 1936, Mason created a partnership with Donald Bruce — Mason & Bruce. Not long thereafter, James Girard joined the group, and in 1948 the firm adopted its present name — Mason, Bruce & Girard. By the middle of the 20th Century, David Mason’s and MB&G’s influence on the forestry industry was second to none. In fact, in 1952 F.K. Weyerhaeuser said of David Mason: “No single person has been more influential in promoting sound forest management on private forest lands than he.” Over the years, MB&G has expanded its range of services, and today has diversified into a full-service natural resources consulting firm, with expertise in environmental services, forestry and geographic information systems (GIS). David Mason 34