Timber and Real Asset Value

Includes: PCH, PCL, RYN, WY
by: Rubicon Associates

Good article from P&I on timber (some of which I post here):

Institutional investors are investing in timberland, trying to fill new inflation-hedging allocations.

A number of them — including the Florida State Board of Administration and Kansas Public Employees Retirement System — have launched searches for timberland managers.

Globally, investors also are showing interest in investing in timber, both in emerging markets and the U.S. Recently, ATP, Hilleroed, Denmark, committed 3 billion Danish kroner ($582 million) to a portfolio of direct investments in timberland.

“Roughly 60% of the return from timberland investments is from the biological growth, which protects the corpus of the investment,“ Mr. Molpus said.

Indeed, for timberland managers one of the most difficult investment decisions is to know when to cut the trees, said Steve Diebenow, principal at Jacksonville, Fla.-based Rock Creek Capital. In good markets, you cut trees; in bad markets, you don't, he said.

“The hard part of investing in timber is, when prices start to drop, you have to have the discipline not to cut your trees,” he said. “As long as it's sunny and there is water, your product continues to grow.”

With Weyerhaeuser, the four timber REITs will make up a significant slice of the total REIT market, and between 5% and 8% of the NAREIT index, said Michael Grupe, executive vice president for research and investor outreach at the National Association of Real Estate Investment Trusts, Washington. NAREIT executives are discussing whether to break out timber REITs into a separate subcategory, he said.

Returns of the timber REITs now in the index have tracked the NAREIT Equity index. The three — Plum Creek, Rayonier and Potlatch — delivered a one-year total return of 26.46%, and a three-year annualized return of 5.87% for periods ended Dec. 31, according to data provided by NAREIT. By comparison, the NAREIT Equity index returned 27.99% for the year and -12.41%

The comments regarding institutional investor interest was also echoed in Rayonier's latest earnings call:

I think there’s a fairly broad mix of buyers out there. I can’t quote the number of [TMOS] for instance but it continues to grow so there’s a fairly large group of buyers.

Bottom line, real assets have value that financial assets cannot replicate. A diversified portfolio should include both.

While I realize that they are still correlated (timber is tied to housing which is tied to economic growth...), when the correlation drags down real assets, they continue to increase in value.

In timber, if GDP is 4%, trees grow, if GDP is -2%, trees grow - value continues to increase (wait until carbon credits gain traction and folks figure out that trees absorb carbon and should qualify for tradable credits, nevermind the biomass aspect).

The rest of the P&I article can be found here.

Hat tip Timber Investor.

Disclosure: no positions