CalPERS Cuts Most of Its Forestland Investment Program

Eighty percent of plan’s timber portfolio was sold at a large loss last month.

The California Public Employees’ Retirement System (CalPERS), the largest US public pension plan, has sold most of its poorly performing forestland portfolio, a consultant’s review of the program shows.

CalPERS and other institutional investors looked at forestland as a new investment opportunity around a decade ago, but it often did not work out as hoped.

CalPERS took a double hit with the sale of the $1.559 billion portfolio, consisting of forestland in eastern Texas and western Louisiana, selling the portfolio at a loss after poor long-term investment results.

CalPERS had purchased the timber portfolio sold last month starting back in 2008, paying around $2 billion as part of then-Chief Investment Officer Russell Reed’s efforts to diversify the system’s portfolio and invest in sustainability-oriented strategies.

The review by consultant Wilshire Associates, which will be presented to the CalPERS Investment Committee on August 13, details that one of timber portfolio’s main investments, Crown Pine Timber, was sold off after the end of the second quarter of this year.

“While the transaction represented a markdown of the portfolio value (at a loss to CalPERS) the sale alleviated the program from further financial stress in the near future, and Wilshire commends the staff for working out a solution to a challenging issue that was a holdover from a pre-financial crisis era investment,” the report reads.

Wilshire went on to say that challenges of the investment included “onerous debt arrangements,” and “unfavorable supply arrangements.” It also noted depressed timber market pricing.

CalPERS officials were not immediately available for comment, but it is their policy not to comment on upcoming board agenda material.

The Wilshire report did not detail the exact amount of the loss CalPERS incurred in the sale or who was the purchaser. One source said CalPERS lost approximately $500 million from the sale.

CalPERS data shows that the Crown Pine Timber portfolio made up almost 80% of the value of the plan’s timber portfolio. The remaining two portfolios, one valued at $425 million, and another valued at $2 million, are also for sale, sources say.

CalPERS does break down specific investment returns for the Crown Timber Portfolio. But CalPERS data shows that investment results for the Crown Timber  portfolio, and a second unrelated smaller timber tract combined, produced a negative 4.2% return in the three-year period ending June 30 and  a negative 1.4% return for the five- year period, also ending June 30.

Ultimately, the forestland portfolio was only a small part of the $352.8 billion CalPERS portfolio. The Wilshire report, however, said the Crown Pine Timber Portfolio, “was a “heavy drag on cash flow,” for the CalPERS real assets program. It said that the negative impact on the real assets portfolio for the five-year period ending June 30, before the Crown Pine Timber sale, was negative 52 basis points.

CalPERS’s $38 billion real assets program, which includes real estate and infrastructure investments in addition to forestland, had a 9.41% return for the five-year period ending June 30.

The global financial crisis, which hit after the CalPERS timber investments, depressed timber prices, causing losses for CalPERS.  It wasn’t the only problem.

Even with those falling prices, Wilshire Associates noted in a report on CalPERS forestland program back in October 2017 that the program was mispositioned because it did not pursue a diversified timber portfolio across the US. The report said CalPERS had invested in timber in the Southern part of the US. It noted that prices were falling in that region, but in the Pacific Northwest, where CalPERS had no timber parcels, prices were rising.

The report also noted that the plan’s use of leverage to buy the timberland was also causing problems.

“The leverage has exacerbated cash flow issues as timber has been harvested to service the debt,” the Wilshire report said. “So, assets that would otherwise have been allowed to grow and appreciate, have been harvested to manage the debt.”

CalPERS has not disclosed the level of leverage in the program.

CalPERS put the forestland portfolio for sale back in 2015, but sources say the system did not sell any parcels because buyers would only buy the portfolio at a large discount that could have caused losses up to a billion dollars.

Wilshire in its new August 13 report, notes that, “current staff had no role in making the original investments and has been working out this investment over the past three years.”

The consulting firm said the sale of the forestland, “allows staff to continue turning focus towards building income-driven strategies that can sustain CalPERS during periods of falling value.”

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