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Monday, December 22, 2014         

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Seed money

A koa plantation on the Big Island courts investors to buy tiny trees and then reap rewards over 25 years

By Andrew Gomes

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On a former cattle ranch north of Hilo, about 20,000 koa trees are no more than 4 feet tall, but they represent high hopes for a company with a new model for renewable forestry in Hawaii.

The endeavor by Hawaiian Legacy Hardwoods is based on attracting wealthy investors to finance a koa farm. As trees mature over eight to 25 years, they theoretically will generate returns to investors and fees to the company for cultivation and the harvesting process.

Hawaiian Legacy's plan is ambitious, with a goal of planting as many as 1.3 million trees by 2016.

The company began selling blocks of 100 seedlings to investors about a year ago. This year the price for 100 seedlings is $6,808. The company projects that those 100 trees could return nearly $300,000 to an investor as the trees are gradually harvested over 25 years.

Local forestry leaders say the company's business model is new to Hawaii, where tree plantations typically have been started by big forestry corporations focused on short-rotation trees such as eucalyptus.

Koa is Hawaii's most valuable native tree, but most koa timber comes from old-growth forests harvested on private land.

Some researchers working with koa are supportive of sustainable forestry efforts but express skepticism about Hawaiian Legacy's expected economic results.

Hawaiian Legacy is marketing seedlings to investors largely on the potential for future financial gain, though company officials say some investors are buying trees primarily to benefit the environment without much regard for profit.

"Our goal isn't entirely being a commercial farm," said Darrell Fox, Hawaiian Legacy's chief operating officer.

HAWAIIAN LEGACY HARDWOODS

What: Sells lots of 100 koa seedlings to investors
Price: $6,808
Projected return over 25 years: $282,946
Where: on 2,700 acres on the Hamakua Coast of the Big Island
When: began selling seedlings a year ago
Co-founders: Darrell Fox and Jeff Dunster

Fox and Hawaiian Legacy co-founder Jeff Dunster believe the model can be replicated by others on large or small scale to help re-establish forests and increase sustainable forestry.

"It isn't impossible," said Dunster, Hawaiian Legacy's chief executive officer. "It doesn't take much to plant a tree. After that it's just a waiting game."

Similar forestry plantation models exist outside Hawaii, including Tropical American Tree Farms in Costa Rica and Samson Tropical Tree Farms Inc. in the Philippines.

Dunster is a former stockbroker and Hawaii National Guard helicopter pilot who also ran a small corporate mergers and acquisitions firm with Fox, whose academic background is in biology and botany.

The business partners said they pondered their plan for about 15 years and explored setting up operations locally as well as overseas.

However, Hawaii landowners with suitable land—typically ranchers with land that once was koa forest before it was cleared for cattle—only recently have been more willing to make land available at a feasible price, in part because the long-term economics of raising cattle versus trees has changed.

Dunster and Fox founded Hawaiian Legacy in late 2008, and arranged a lease with a purchase option for 2,700 acres of Hamakua Coast pastureland that contain remnants of what they say was a vast koa forest before cattle were introduced to the area toward the middle of the last century. The pair expect to plant an average of about 480 trees per acre on the land.

Over the last year or so, the company has solicited investors to help finance the envisioned plantation of "investment-grade" trees.

Because significant risk is associated with the venture, federal Securities and Exchange Commission rules limit Hawaiian Legacy to raising money from "accredited investors"—essentially financially well-off entities that include banks, insurance companies, retirement funds and individuals with annual net income over $200,000.

Dunster and Fox say they have had little trouble raising money, but declined to disclose how many blocks of 100 seedlings they have sold to investors. Of the 20,000 trees planted last year, Dunster said most were sold to investors. Hawaiian Legacy owns the balance.

In its investment materials, the company projects that 100 trees could conservatively return $282,946 to an investor over 25 years, including $9,646 after eight years, when the first trees are harvested. The projected earnings are based on several assumptions including tree growth rates, mortality, lumber yields, koa wood price appreciation and harvesting costs.

Hawaiian Legacy would earn close to $50,000 over the same 25-year period for 100 trees based on estimated care and harvesting fees.

Under Hawaiian Legacy's projections, its first grove of 20,000 trees would be worth about $56 million over 25 years to investors.

By comparison, all forestry in Hawaii—not just koa—has been a $30 million annual industry for many years, according to the Hawaii Forest Industry Association.

Some in the koa industry scoff at Hawaiian Legacy's projections and believe it is impossible to reasonably project lumber yields and future koa prices.

Among one of Hawaiian Legacy's projections is an estimate for the value of koa lumber per board foot rising from around $6 presently to around $24 in 25 years, an annual increase of 6 percent.

Travis Idol, a University of Hawaii associate professor of tropical forestry and agroforestry, is skeptical of Hawaiian Legacy claims. "We're not saying they cannot grow trees, and nice big trees," he said. "But if they're trying to grow timber, we would question some of their projections."

Idol said previous koa plantation efforts have succeeded in growing trees, but the quality and quantity of lumber have been disappointing. "The projected volume of timber was not achieved," he said.

A December study led by Paul Scowcroft of the U.S. Forest Service concluded that most plantation-grown koa trees fork too close to the ground to produce much merchantable wood. The study said no one has demonstrated that koa plantation forestry can be financially successful, and that this has hindered private investment in the industry.

UH researchers also say there is little industry knowledge of how to best improve productivity through cultivation practices such as fertilizing and thinning.

Dunster acknowledges that he can't be certain how Hawaiian Legacy's trees will turn out, but he said the supply of old-growth koa with long straight trunks won't last forever the way koa forestry has been practiced historically.

"The world is running out of this resource," he said.

Some of Hawaiian Legacy's investors are Hawaii-based woodcrafters who recognize koa is a dwindling resource. Among them are artists Don Albrecht and Cliff Johns.

Johns, a wood-turner with a gallery in Holualoa on the Big Island, said owning trees was a great opportunity. "It's exciting," he said. "It makes us feel better about using the wood."

Hawaii's largest koa purchaser, furniture maker and retailer Martin & MacArthur, sponsors koa plantings through customers who buy furniture. For each piece of koa furniture purchased, Martin & MacArthur will pay for one tree to be planted on Hawaiian Legacy land. Customers can also pay $59 to Martin & Mac-Arthur to have a tree planted. Michael Tam, Martin & MacArthur CEO, said the company has to date sponsored about 50 or 60 seedlings, which are retained by Hawaiian Legacy. However, Martin & MacArthur hasn't invested in its own trees.

Mike Robinson, a Hawaii Forest Industry Association director and a forester with the state Department of Hawaiian Home Lands, said koa is definitely a valuable niche that has lots of growth potential.

But he cautions people about thinking that they can retire on proceeds from a koa farm investment, because much is still unknown about growing the tree prized for its grain.

"Commercial forestry is like any type of agriculture," Robinson said. "There are a lot of risks involved. And the longer your investment, the greater the risk."

Primary risks to farming koa include fire, disease and pests.

Hawaiian Legacy said the risk of fire is relatively low because of the area's traditionally wet climate. The threat of lava from the island's active volcano is low for the area. Other risks like insects and disease are harder to control, but Dunster said they haven't been a problem in the area.

Fox said one advantage Hawaiian Legacy has is growing trees derived from the same tree families that thrived in the area long ago.

"The site is absolutely perfect for growing koa," Fox said.

More than 1,000 mature koa trees still exist on the 2,700-acre site, mostly in gulches and other areas that were inaccessible to cattle and loggers, Fox said.

Hawaiian Legacy plants new trees in a nursery from seeds selected from what they have identified as the best trees on the property. The trees are fertilized but don't need irrigation because the area has relatively high rainfall levels.

Each seedling is affixed with a radio frequency identification tag that allows the company to easily monitor growth trends and to give owners information about their trees.

Harvesting the trees could be done at existing mills on the Big Island or by developing a mill for the plantation.

Fox said the company is preparing to plant about 60,000 trees this year and expects to sell most of those trees to investors. With planned expansion of the nursery, Fox expects Hawaiian Legacy will be able to cultivate 120,000 trees next year.






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