Historically, timberland appraisals tend to be completed at the end of the fourth quarter of each year. This allows year-end financial statements and net asset value reports to be based upon the current timberland appraisal results. As a result of this practice, most of the capital appreciation return in the NCREIF Timberland Property Index is recognized in the fourth quarter. For example, in the case of the Pacific Northwest Timberland Property Index, you would have to go back to 2006 to find an instance where the fourth quarter did not represent the largest quarterly change in value. In the case of 2006, this is almost certainly due to some large mid-year timberland transactions that were recognized in the Index.
In addition to the odd result of having most of the capital appreciation in a given year taking place in a single quarter, this historical practice has other significant disadvantages. The concentration of all of these appraisals in a single quarter causes unnecessary workflow issues for both the managers and the appraisers. In the case of the managers, the fourth quarter can often be a struggle for those pulling together data for appraisers because there are a lot of other reporting and timber inventory updates that are also concentrated in the fourth quarter. In the case of appraisers, the fourth quarter crunch can also cause workflow issues and potentially increase the cost of performing the appraisal to compensate for this workload peak. To the extent that log price and cost data from the quarter in which the appraisal is performed affects value, the fourth quarter of each year may have undue influence on appraised values.
Recently, we have noted that some of our investors have requested we change this practice to spread appraisals of different properties within a single portfolio to different quarters throughout the year. The investors appreciate seeing timberland appraisal reports throughout the year to get current information on factors affecting timberland values. This helps them answer questions about changes in the timberland market and appraised value of their portfolios. A contributing factor to this request may be International Financial Reporting Standards, which tend to raise additional questions on the appraised value of their timberland investments.
As a manager, we also reap the benefit of our appraisers’ latest thoughts on discount rates, log prices, and costs throughout the year, instead of just once a year. The manager can then use those appraisal results to determine if changes should be extrapolated to other properties in the portfolio that were not appraised. Of course, we also benefit from spreading the workload throughout the year rather than concentrating it in the fourth quarter. These more frequent and timely reports from appraisers and more even allocation of workload across the year can provide real benefits to the timberland manager.
For now, the NCREIF Timberland Property Index still shows a significant concentration of capital appreciation results in the fourth quarter. Over time, we would not be surprised to see a trend towards appraisals being distributed throughout the year, consequently spreading the capital appreciation results throughout the year as well. However, this change is going to take some time because it is unusual for a manager to change the quarter in which a property is appraised. Changes in appraisal timing tend to follow an acquisition when the new owner decides to get the first appraisal. Increasingly that timing is dependent upon when the property is acquired rather than just waiting until the fourth quarter. The benefits of this change will extend to many participants in the timberland investment industry.