Photo Courtesy of PLum Creek Timber Company

Rick Holley’s focus on maximizing value is at the root of Plum Creek’s success

By Lorna Pappas

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AGE: 55 EDUCATION: B.S. in accounting and business administration, San Jose State University; executive development program, Northwestern University FAMILY: Married to high school sweetheart; three grown children; five grandchildren HOBBIES: All sports, especially golf LAST BOOK READ: “The House of Mondavi: The Rise And Fall Of An American Wine Dynasty” by Julia Flynn Siler FAVORITE SPORTS TEAM: Seattle Mariners FAVORITE VACATION SPOT: Hawaii PROFESSIONAL ACTIVITIES: Serves on several boards including Plum Creek, the World Forestry Center and The Blethen Corporation; Member of the Visiting Committee of the University of Washington School of Medicine and NAREIT’s Board of Governors

What do a small stream in Minnesota, Lexus steering wheels, natural gas, stacks of paper and an NBA basketball court have in common? The Plum Creek Timber Company (NYSE: PCL), whose timberlands produce a wide range of products, from decorative automotive parts and energy products, to paper and hardwood floors.

Plum Creek is the largest and most geographically diverse private landowner in the U.S. today. Chief Executive Officer Rick Holley leads the company with a disciplined focus that's delivered annualized total shareholder returns of 20.1 percent over the five years ended Sept. 30, 2007.

Holley's focus is on maximizing the value of Plum Creek's assets, which encompass 8.2 million acres of timberlands in every significant timber-producing region of the United States. These regions include 4.2 million acres in the Southeast, from the Carolinas, Georgia and Florida to Texas; 1.7 million acres in the Northwest, including Montana, Oregon and Washington state; and 2.2 million acres in the hardwood dominated regions of Maine, Michigan and Wisconsin.

Holley says Plum Creek's mission is to leverage the maximum value of every acre. That might mean harvesting, selling or manufacturing timber. It could also mean optimizing the land's natural resources, selling or conserving the land, or allowing the trees to grow and appreciate.

Portfolio spoke to Holley about the viability of timberlands, maximizing land value and energy opportunities.

Portfolio: What is attractive about the timberland sector and why should investors look into it?

Holley: Timber is a great asset class because, unlike other commodities, it increases in size and value every day. It generates high cash flow margins and long-term price appreciation, performs well in times of high inflation and requires minimal capital reinvestment.

Our extensive land holdings provide significant market risk reduction through geographic and species diversity. For example, we own softwood trees, such as Southern Yellow Pine in Mississippi and Douglas fir in Oregon, and hardwoods, such as Hard Maple found in Wisconsin, Michigan and Maine. Owning a variety of species achieves significant risk diversification and enhances our operational and financial flexibility.

When Plum Creek buys timberland, we acquire the trees and the land. Thus, we are the largest private owner of timberland in the United States, and we're second only to the federal government overall. Our core assets appreciate in value every day.

Revenue is lost in other real estate segments when space isn't rented from month to month. However, when there are tough times in timber, we don't harvest the trees. This allows them to grow in size and value until the market improves.

Portfolio: How does Plum Creek focus on maximizing land value?

Holley: Our goal is to become more valuable. We are constantly assessing the value of the trees, natural resources and real estate opportunities within every acre of our markets across the United States.

Our timber, real estate and construction management teams decide how to reap the most value from a land parcel. For example, we'll harvest half the trees then sell the surface sand and gravel to a local highway project, or we may sell the whole piece for recreation or conservation development.

If the timber alone is worth $1,500 an acre, we can receive $10,000 an acre in some markets by extracting the timber and the natural resources, such as coal and natural gas, then selling the parcel for real estate potential.

As more investors understand Plum Creek and see the discipline we exert in terms of value, they increase their investments and our stock price rises.

Portfolio: Explain the disparity you see among the different analysts that cover Plum Creek.

Holley: The value of timberland is much higher than what's represented in our stock price. Our first priority is to close that gap. We are educating investors on the valuation of our timber, which includes oil, gas, minerals and other natural resources within the land and the real estate itself.

Forest products analysts have a deep understanding of timber, paper and wood products, but not of real estate. We need to educate analysts on this value potential. At the same time, many real estate analysts know little about forest products. We have been giving investors and analysts tours of our assets and providing more insight to our 10K, 10Q and quarterly earnings. We're also educating them about timber and land values in different parts of the United States and how we are capturing that value.

Another way we focus on shareholder value is by using our capital to buy back our shares. We recently purchased approximately $263 million in shares because we think the cheapest way to buy land and timber is to buy Plum Creek stock.

Portfolio: What new opportunities are emerging in your marketplace, and how are you capitalizing on them?

Holley: We are most excited about the nation's trend in becoming more energy self-sufficient, and see wood emerging as a new source for cellulosic ethanol. We are positioned to benefit from this emerging opportunity, because we are the largest provider of wood fiber.

To tap into this opportunity, we leverage treetops and limbs of trees we harvest as a new source of energy to companies building facilities to convert wood fiber into burnable pellets, rather than discarding them.

Portfolio: How are you weathering the slump in housing activity, which affects your timber and lumber business?

Holley: Plum Creek is geographically diverse, with timber and land assets that have their own local supply and demand situation. With such diversity, earnings in one part of the company won't greatly impact others, providing a financial flexibility that helped us withstand today's difficult housing market. For example, the Southeast markets have been weak, so we've cut less there. However, in the Northwest, the housing markets—and, therefore, log prices—have held up well.

The downturn in the housing market directly affects our customers. During the fourth quarter of 2007, lumber prices reached their lowest level since 1991—approximately 30 percent below their 2006 highs. However, our log prices declined much less from their 2006 highs, approximately 13 percent on average, so we're indirectly affected.

At the same time, there is growth in our real estate business, where most of our land is in rural areas. Here we are selling land for recreation, hunting clubs and other rural uses. We sell only where the market is strong.

Portfolio: You did not originally have a background in the timber and land business before joining Plum Creek as CFO. What attracted you to this company?

Holley: I love the outdoors, especially the woodlands, with all its natural beauty and wildlife. I spend time in the forests talking with wildlife biologists about bears, salmon, spotted owls and the health of our trees and environment.

Since I love the outdoors, I also want to protect it. The timber business offers a way to help the environment with global warming, because trees store carbon and are good for the ecosystem.

As for my career path that led me to this company, I started at a job with General Electric in 1974 because it strongly valued financial management. Serving as an auditor for GE, I traveled the world and was exposed to many different businesses. I observed the good, the bad and the ugly of financial and executive management. It was a fantastic learning experience.

From there, I joined Burlington Northern, Inc. in 1983 where there was better potential to more quickly realize my career objectives. As head of corporate audit, I developed an excellent understanding of Burlington Northern's many businesses, including its railroad, oil and gas, real estate, mineral companies and its timber company—Plum Creek.

In 1985 the CFO position at Plum Creek became available and I was fortunate enough to take it. I took over as CEO of Plum Creek in 1994, and continue to enjoy the industry's evolving issues and opportunities.