Domain Timber Advisors sold majority interests in seven operating companies that own stream and wetland mitigation bank assets in the south-central US. Financial details were undisclosed.
The land assets total approximately 3,163 acres and were formerly used for agriculture, cattle grazing and commercial forestry. They were acquired by the 2008-vintage Domain Environmental Investments II vehicle between 2009 and 2011.
Domain Timber Advisors managing director of natural resources Joe Sanderson declined to disclose the return rates the investments had delivered, but he did offer a range for what funds invested into similar assets could be expected to deliver.
“You’re looking at low to mid-double digit returns so up to 15 percent to 20 percent is not uncommon in this space. But if you don’t have the demand or if you don’t construct or finalize the project, the returns can be eroded pretty severely,” Sanderson told Agri Investor.
The assets were based in the states of Arkansas, Louisiana and Texas and were selected because they were in regions where Domain anticipated demand for compensatory environmental credits. These credits are predominately required by corporations that want to build on pre-existing wetlands and natural habitats and must protect and restore one acre of such wetlands for every acre they disturb, said vice-president for natural recourse investments Alton Owens.
“[We look for a] history of anthropogenic impact such as, has this site been degraded from an ecological function standpoint? Have previously available wetlands been drained? Have streams been channelized or altered? Has a wildlife community been affected by man?”
This typically means the firm looks for sites that have been severely damaged by agriculture because “conventional agriculture can be a pretty significantly altering practice when it comes to aquatic resources,” said Owens.
Once the firm achieves certain restoration thresholds, such as wetland rehydration, a doubling in the size of trees or an increase in a wildlife species, the regulatory body, which is either the US Army Corps of Engineers or the Environmental Protection Agency depending on the site’s location, releases credits into the managing company’s ledger.
The sale of these credits, as well as entry fees for recreational use of the assets for activities such as horseback riding, hunting and fishing, provide the main sources of revenue. The firm’s exit strategy involved leaving behind “residual credits” which the new owner can trade, without having to take on the construction and project finance risk of the asset, explained Owens.
The $250 million close-ended Domain Environmental Investments II is now “almost 70 percent” divested said Sanderson, with the remaining assets made up further wetland banks and conservation bank assets on the West Coast of the US.
Investors into the fund were more heavily weighted to European institutional investors, added Sanderson, with some US pension plans also involved.