After reading many very good posts here, I've
noticed several people mentioned timber as one of
the asset classes to hold on a diversivied portfolio.
I have no experience in timber investments so I'm
curious...and have lots of questions:
- why should I hold timber, ie. how does timber help
me diversify my exposure and returns? What is the
correlation of timber to other investment classes?
- how do I invest in timber? Specific timber stocks?
Mutual funds?
- what kind of returns can I expect from timber
investments?
- what has your specific experience been with timber
investments?
Joe
Hi Joe,
I would recommend reading the last 2-3 years of annual reports from Plum Creek
http://www.plumcreek.com Investors Tab (short). They give a good overview as to the benefits of timber and how they manage their 7.8m acres to get the highest return. Also
http://www.Rayonier.com and
http://www.Timberwest.com to get the other major US player and the Canadian player.
Timber provides a way of owning a renewable resource that replaces what it produces (unlike a gold mine). Biological growth averages 7%, timber increases in value as it growth taller and wider. Timber companies harvest 5-7% a year, payout a good portion of the cash flow this generates and reinvest some. The capital expenditure costs unlike real estate are very low and margins are high on their operations. It is also an environmentally friendly operation with certificated forestry, which appeals to some investors.
The demand and uses of timber as not correlated highly with the movement of stocks. There is some correlation to real estate but it is more on the development side and even then it is not substantial. One can receive the 4-5% yield and happily live off that and never need to sell off any shares should one wish. A very simple investment in that sense. There are few things that can go wrong. Plum Creek, for instance, owns forests in 21 states across the U.S., this reduces the risks from fire which are minor today. Less than 0.50% is loss to such risks.
Returns have varied over the years. The early 90s was a boom time, currently timber prices are lower and returns have fallen. Returns comprise the cash flow from harvesting the 7% biological growth each year which is paid out as a dividend (Plum Creek & Rayonier are both US REITs with mandated payout levels) and the capital appreciation from their standing timber & land values. Timber has appreciated up to 4% above inflation. US timberland from 1970-present has higher returns than the S&P 500 Index. Over 10% annualised. 10-Year returns to 2002 were 9.9%. All the public companies above have offered good returns circa 8-12%. Respected Jeremy Grantham of GMO thinks 7% real is possible for timberland. Companies like Plum Creek are also selling off timberland that is choice vacation or second home property, releasing latent value there and recycling that into cheaper core timberland elsewhere. This adds incrementally to their returns from the considerable assets they own.
For my own purposes I plan for the steady harvest of 4-5% yield and inflation uplift on the value of the timberland itself. Whilst in recent years timber has not appreciated as well as it has in the past, there are enough other opportunities for excess returns and smart management to benefit. Plum Creek often delay harvesting when prices in local markets are low, waiting out better pricing. This boosts returns over time. They're very smart managers of their assets. It is important to understand that it is the steady returns and consistency that investors like about timberland investment. It is not a dot com flashy investment and will not provide 20% annualised returns over time. It does however provide a way of isolating yourself from the day-to-day concerns on market price movements because income is steady, valuations rise with inflation over reasonable periods of time and the accounting is simple enough that you do not get an Enron-type situation.
It is worth noting that as REITs PCL and RYN are included in the MS REIT Index however the allocation is small. Timber is a separate asset class, the companies just use the REIT format because of the large asset nature of their businesses, the high cash flow and the tax beneficial nature of the structure. Timber is a very different asset from the ownership of commercial & residential real estate and so one should consider it separate and consider allocations to timber on its merits. I include timber in my natural resources asset class which includes energy and metals & mining. Real estate securities are a different asset class because their return drives are very different.
PCL, RYN and TimberWest lookup on Yahoo for ticker are the main investment vehicles.
Article from respected author Andrew Tobias:
http://www.andrewtobias.com/newcolumns/030814.html
Good one pager on Timber:
http://www.timbervest.net/investing_in_tim.htm
Hancock Timber manage timber properties for major endowments including Harvard who have 10% in timberland:
http://www.htrg.com/htrg/research_lib/quart_letters/current_n.html
Directly-held timber index returns:
http://www.ncreif.com/indices/timberland.phtml
Petey
