Irish Forestry Services - Interview

To find out a little more about IFS Asset Managers and their various investment schemes, during late June I met with IFS managing director, Trevor McHugh, in the company's HQ in Dun Laoghaire, Co. Dublin.

First, I asked Trevor about his own background: "Having graduated in the mid-nineties I commebced by career in banking and after a couple of years, I was looking around for a change, for something that was a little more in line with what I focused on in college, which was the small to medium sized enterprises.  I heard about Irish Forestry Services and what they were doing. They sounded like an interesting company: they certainly sounded like a company with a vision about where things were going in the forestry sector. After taking a more serious look at the company, I joined IFS in 1998."

While IFS has twenty one forestry investment companies/projects active at present, only two of those had been launched when Trevor joined; these were the thirty year Irish forestry funds.

Employment
"There is a total of at least six people aat any given time here in Dun Laoghaire. Myself and Paul Brosnan are the directors of The Irish Forestry Funds and of the management company, but then we have our financial controller, and our land and acquisitions manager and we have our full admin and compliance team here also."

Forestry Management & Advice
"Forest Enterprises Limited play an important role in what we do, as they independently vet what is done on the ground. Before we buy land, they are brought to see it: they will check that it is suitable for the requirements of the forestry investment project.  If it's not in-line with our needs then obviously that's it, we walk away.  If it is, then we move forward and they audit any work done on the property and continue to do so on a year to year basis."

How do you source new land or property to invest in?
"Typically, we source land from contractors, auctioneers and directly from forest owners who wish to divest of their existing forests. And, of course we will go out and look at any plantation that is put our way."

The investment companies, are they based on one acquisition or on a number of acquisitions that are combined together?
"Each of our recent investments is based on a certain amount of land in semi-mature forestry: indeed, right back in the very start it was all bare land that we were buying for the purpose of afforestation.  At this stage we are looking at developments in the market and we are predominantly going for semi-mature forestry.
We have in the region of 17,500 acres of afforested land with ongoing purchases taking place all of the time."

Do you purchase forests in all parts of Ireland?
"We have two main centres of forest locations. There's the north-west and south-west.  But if you were to look at it on a map of Ireland, you are talking about a very wide spread of area in those two regions , throughout  Mayo, Leitrim, Cavan and also Galway, Roscommon, Longford and also throughout Limerick. We are very heavily involved in north Kerry and central Kerry, north Cork, Tipperary and Limerick."

Is your current plan still open for investors?
"No, that investment plan was oversubscribed prior to the scheduled closing date of 29th June. It closed three weeks early."

Doing the deal
"If I shake the owner's hand and do a deal then he is obviously going to be anxious that we do the transaction within as short a period as possible.  Now if we were to shake hands on a land acquisition prior to actually arranging finance we would be pushing ourselves needlessly into the position where possibly we couldn't complete the transaction. so what we do is we arrange the funds; we lay down within the document the criteria upon which we will select and identify that, and then based on those criteria we move forward and this is where Forest Enterprises Ltd play such an important role: they ensure that when we do actually shake the farmer's hand and do the deal that the land is of the necessary quality."

Future Worth
"Yes there are projections; they are very complex and there are no certain forecasts as there are too many variables in the market-place. The investment risks are outlined in the document and the projections are based on historical land and timber price data.”

The tax free side of forestry - is that an incentive?
"Definitely it is.  I think it's very important for the Irish forestry industry where you are talking about long-term commitments from people. Tax free incentives attract investors and encourage private sector development."

Apart from the returns from the mature timber, does the increasing value of the land play a big part in the forecasted value of the investment?
"Yes I see where you are coming from on that; with the current legislation, which I am aware is being reviewed and could be changed quite fundamentally, when land goes into forestry, it has to remain in forestry for ever.  As a result, the projected financial returns will come from what we expect to receive from the sale of the timber. Then if and when the legislation is changed, and I imagine it is going to be changed, land previously in forestry can be returned for agricultural or other uses. That can only have a beneficial impact on the value of the underlying land."

Are any of the larger companies, Greenbelt or Coillte, for example, involved in any of your projects?
"Greenbelt would be one of our main contractors and we use them quite seriously in a lot of our work that we do around the country."

Do they ever take part in an investment?
"Through their role as contractors they do, but I have no idea if they have invested individually as we have 15,000 investors in total."

Are IFS original investment projects near maturing or sale?
"No, that was one of the early forestry funds: the purpose of the forestry funds were to buy a portfolio of green field sites, have them established and allow investors benefit from the returns from the complete forest cycle - from planting to harvest and timber sale. So with the early forestry funds, we're nine years into them at this stage. They have a thirty year investment cycle, so we will be looking to see a return out of that in about 21 years time."

And the investment plans, are they shorter?
"Yes, the 10 year forestry investment plan, the first of those will be maturing in 2010."

In terms of current market prices, will the return be as good as projected?
"Absolutely, if the current trend were to continue they would be doing very well indeed."

How do you [Irish Forestry Services] make a profit from the investments?
"Well going back to the forestry funds [companies], their purpose in life is to raise the capital, then acquire the land and have that land managed.  The directors of the company are not paid by the company.  What is in place is a contract between the company and the management company. That management contract is there to oversee the management, obviously, of the various parties who are involved. There is quite a significant job to be done just in the administration and in the professional business management of those companies, with audits, legal matters, conveyance, etc.  There are also various company secretarial roles, such as maintenance of share registers, compliance and things like that. So that's how IFS and ultimately the directors of forestry funds are employed; so we will be paid by the management company."

'Ethical investments' is a much used term today;  are your schemes benefiting from that?
"Certainly an area of great interest, you cannot pick up a newspaper nowadays without reading about CO2 emissions.  Until such time as greater clarity is brought to the area of carbon trading, the existing funds are not going to benefit to any great extent, but when clarity comes around that particular issue the potential for any forestry, whether it be a forestry investment company or the private forestry owner, the potential there is quite significant. Its certainly a very interesting area.  With regards to the individual who decided to invest into the forestry funds, it is something that people do ring us and ask us about all the time, but again until clarity is brought around carbon emissions, carbon trading etc. - it's a case of monitoring and watching what happens."

How many investors are there in your most recently completed plan?
"There would be in the region of 600 people."


How did they hear about you and find out about your products and investments?
"Many different ways.  We do advertise in the national press.  There are about 17,000 people who have contacted us over the years, so of course we would contact those people directly.  Reinvestment accounts for about 30% and the balance comes from new investors.”

How does the forestry investment package compare to other investment opportunities?
"For new investors without any particular knowledge of how the forestry funds work, we try to make the process as straightforward and as simple as possible. The documents that we send out are very straightforward and we recommend that they seek independent financial advice.  Back when there was a bit of an upset in the equities and the dot-coms, people did look at diversifying, and forestry was one area where investors became interested. People did actually start looking at us as being a part of a diversifying portfolio.  I'm not saying that people suddenly began to think that forestry is the be-all-and-end-all, but they did and do see it as another aspect of the investment world and see it as something that they want in their portfolio."

What is your relationship like with professional forestry organisations here?
"We have a good relationship with them and also quite a number of business and professional dealings with them."

Future
"I think is it is an incredibly exciting time to be involved in the forestry sector.  Looking at the opportunities that are coming down the road at us and I'm not talking just about the company but as an industry sector in this country, I think the opportunities are really better than ever.   When we started out, nobody was paying any serious attention to the idea of biofuels, there was no talk of people having wood chip burners at the back of their houses, instead of oil burners. There is a whole new market developing and this is at a time when we are already undersupplied in Ireland for many timber types.  When you combine that with the possibility of carbon credits down the road, it really is an exciting time to be involved in this industry."

Finally, as an aside, Trevor pointed out that all investors have the opportunity to go and see/the actual forests they have invested in; but very few do take them up on this offer. The fact that this opportunity is available could be reassuring to potential investors.

My thanks to Trevor for taking the time to answer my varied and sometimes confused questions.  
In the September October 3issue of IT&F we plan to examine other forestry investment opportunities available in the Irish market.