BY: JIM WEBB, Managing Director
(336) 817-7324 jwebb@argenttimber.com
with MICHAEL SHEARER, Managing Director, Chief Investment Officer
(270) 404-0435 mshearer@argenttimber.com
and CHARLIE DANIEL, Managing Director, Acquisitions
(850) 559-0046 cdaniel@argenttimber.com
Alternative investments began lighting up the financial world in the late 1970s, when ERISA pushed institutional and family office investors into considering assets like real estate, minerals, leveraged buyouts and private equity. Alternative investments still remain relevant today because of their negative correlation with the stock market. They diversify and shift risk, making portfolios partially immune to mainstream economic drivers.
Timber and timberland are alternative investments that many have found to be an excellent addition to their portfolios. Timber hedges against inflation and in certain periods can produce higher returns than stocks.
Timberland Investment Performance
From 1987 through 2016, the NCREIF Timberland Index averaged 11.9% return per year. Standing timber prices continue to slowly recover from the Great Recession, and are poised to return to normal market dynamics – responding to the price of lumber – once the recession-induced overhang of timber has been depleted. Timberland is very much a regional investment, as varying species and different markets drive prices in particular areas. The US South is dominated by softwood forests, the yellow pines. These are used for pulp and paper, energy fiber, lumber, plywood and oriented strand board panels. The Appalachian region supports hardwood forests, used for flooring, furniture, cabinetry and industrial lumber. Northeast and Lake States forests grow both hardwoods and softwoods, while the Pacific Northwest is focused on softwood forests of Douglas-fir and hemlock.
Timber is a renewable asset, which means astute timberland management is crucial to investment performance. Only well-managed forests – those that are properly established, protected, thinned and sustainably harvested – can compete. Argent Timberland Group provides this level of management both in the United States and globally – working to fulfill our clients’ specific needs while covering every aspect of the business, from acquisition to silviculture to property accounting.
Timberland Management Strategies
Forest dividends are capital gains that can give you more control than most other incomes. You can wait for fiber and log prices to rise before you cut, or harvest when other investments have depreciated.
Some aspects of timberland management are both an art and a science. Acquisition due diligence is essential, and a good appraisal, which is a mix of both of the above, is necessary, along with an accurate timber inventory and title detail. You’ll want to select a forest type and site quality that suits your investment goals. Some soils (site indices) will foster quick growth, shorter harvests and more frequent cash flows. Other sites will suit patient investors who expect some income but also want to include recreational and aesthetic enjoyment along with timber harvesting. When your pulpwood or sawtimber is placed on the market, you’ll also appreciate nearby markets that support price competition. Following a timber harvest, some of your income can be used to replant and improve the remaining forest.
In the past, large scale timberland ownership was the stomping grounds of the forest products industry. Through timberland transactions that has shifted to timberland management organizations (TIMOs), which target yield and investment returns in an environment of transparency and social responsibility. It requires a balance of social awareness (being a good neighbor) and investment and forest management knowledge—a skill that Argent Timberland Group understands intimately.
The Timberland Trend
Timberland investment has gone mainstream to such an extent that everyone from pension funds to family foundations have invested in it via comingled funds and separate accounts, as well as direct investing. This asset class is a long-term investment requiring years of patience, although investors always have the option to sell the growing enterprise. Cash flows are determined by the age distribution of the property – a very young forest may produce little cash for several years while the trees mature and the asset appreciates, while an older forest can be harvested early in the investment period. In either case, trees can be “stored on the stump” during cyclical price declines, where they continue to grow and add value. Ultimately, landowners are also left with their acreage and a growing forest which continues to appreciate.
The Future
Natural resource assets are necessarily affected by climate change, and timber is no exception. There will be positive effects – all plants grow better with increased CO2, as well as adverse effects – warmer, drier conditions may increase fire frequency and insect problems, and storms may be more severe. Timber management will have to adjust to these changes, further solidifying the value of skilled management teams to oversee the investments. Insurance against physical risks is available at reasonable costs for large aggregations of well-managed timberland.
Forest product demand is expected to double by 2030 with population growth and increased usage of wood products. Population growth and pulp usage are highly correlated, particularly as large segments of the populace see increased standards of living. New forest products also factor into the future demand scenario. As an example, oriented strand board, a product made from small, low-value trees, now competes with plywood for many uses. Demand for energy from wood pellets and biomass has underpinned fiber prices in much of the US South. Cross laminated timber, an engineered wood product that is a cost-effective, sustainable alternative to concrete and steel in many building applications, could potentially have a significant effect on the sawtimber market in the US.
Timberland is a rewarding investment on several levels, not least of which are the attractive projections for the future.
