A Walk in the Woods – Investing in Timberland

Guest article by Tom Brickman:

With the stock market at all-time highs, many have forgotten that six years ago everyone’s stock portfolio lost a gut-wrenching 40 percent in eight months, and with money market rates around 0.4 percent, cash is not keeping pace with inflation. High volatility with a low yield is an unpleasant combination for anyone, and while alternatives seem scarce, investing in timberland tends to satisfy many security needs.

People are beginning to turn to timberland investments, in fact in America there are 23 million private timberland owners. Prices for stocks and bonds can go up and down dramatically over short periods of time, sometimes as short as a single day, but timberland values tend not to fluctuate. Over 50 percent of the return from timberland comes from biological growth – trees get bigger at a steady rate independent of market factors. Diversifying a portfolio by investing in timberland can reduce value swings.

What are the different types of timberland?

In the south there are a few different types of timberland: land that will grow pine trees (dryer ground), land that will only grow hardwood trees (wetter ground), and farm land.

The kind of land you buy depends on the mix of motivations you have for buying it. Those motivated purely by financial benefit will seek investment-grade pine properties. In the south, this is land that has been planted with genetically improved loblolly pine. Those more interested in hunting, which means less return, will seek properties that have more hardwood land, perhaps with a lake or river frontage too. Investors motivated by conservation may seek longleaf pine or hardwood land along major rivers. Investors motivated by a farming lifestyle or by crop and livestock markets will seek land suitable for cultivation or pasture. Returns from farmland tend to be more volatile than returns from timberland due to government involvement in the markets. Many investors have a mix of motivations and accordingly seek a mix of land types.

How do you go about investing in timberland?

In general, there are two ways to go about investing in timberland. One way is direct private investment where the investor owns the asset. The other is indirect investment where you purchase stock in a public company that owns the asset. The way you invest depends on your motivations.

Direct Investment

Direct investment gives the investor more control over the decision of when to sell timber. This can have a very beneficial impact on returns. You can purchase land to meet a variety of motivations. Disadvantages include the task of finding assets to buy, discerning fair value, finding asset managers, and finding buyers when you are ready to sell (lack of liquidity).

A key issue with direct investment (mostly affecting smaller non-institutional investors) is that markets for privately owned rural land are notoriously difficult. For example, finding assets to buy is difficult because there is no central clearing house of properties available for purchase and the for-sale-by-owner market is huge (our experience is  up to 50 percent of private land sellers do not use an agent to find a buyer). Also, discerning fair pricing requires expertise in appraising land and standing timber. Consequently, most investors engage professionals to assist with finding, buying, managing and selling land.

Indirect Investment

Publicly traded forest products companies seek to maximize financial return. Buyers with this motivation find a good fit here. Advantages to indirect investment are that it simplifies the task of finding, buying, managing and selling timberland assets. The price is published every day so there is low price uncertainty. And, the companies have professionals to manage the assets (selling timber, planting trees, fixing roads, paying property taxes, etc.). A disadvantage to investing in a public company is that quarterly demand for dividends, which affects share price, forces these companies to sell timber even in poor markets.

Institutional investors (pension funds, endowments, sovereign wealth, etc.) and high net worth individuals often address these issues by investing through Timberland Investment Management Organizations (TIMO’s). These are private companies that specialize in finding, buying, selling and managing timberland assets. Although most have financial return as their mission, some specialize in conservation timberland. The best TIMO’s offer geographic diversity (US & global) and have decades of experience identifying deal flow, managing the purchase process, managing the asset on a day-to-day basis, and finding buyers when it’s time to sell.

People who don’t meet the minimum investment threshold for a TIMO (most investors) can get professional assistance from an enormous network of rural land and forestry professionals. Many of these are small, local companies or individuals with deep knowledge of the asset and long experience with local land and standing timber markets.

Is investing in timberland right for you?

This is a question only you can answer. The purpose of this article is to give you a starting spot for further investigation. Here are some thoughts to consider:

1. Get professional assistance for direct investment. A key issue is that the hardest mistake to overcome is paying too much. The saying is you make your money the day you buy it.
2. A diverse portfolio is your best protection against loss of value. So only add land if you are looking for diversity.
3. Direct investment in land requires patient money. Getting in and out of the asset takes time. So only use funds you can afford to invest for 10 years or more. Using your self-directed IRA to buy land is allowed and is the perfect kind of money to use.
4. Land does not service debt well. Be careful that your reach does not exceed your grasp.

Learn More:

1. Data on ownership & financial performance of land:
   1. The National Council of Real Estate Investment Fiduciaries (NCREIF):
      • Timberland returns
      • Farmland returns
   2. The Forest Research Group
   3. U. S. Forest Service Resource Bulletin WO-1
   4. Family Forest Owners: An In-depth Profile. By The Sustaining Family Forest Initiative
2. Direct investment & management professional
   1. All individuals – farm and timber land:
      • Association of Consulting Foresters
      • Realtors Land Institute
   2. High Net Worth Individuals and Institutions:
3. Timberland investment & management professionals
   1. Resource Management Service
   2. Campbell Global
   3. Forest Investment Associates
   4. The Hancock Timber Resource Group
4. Farmland investment & management professionals
   1. Hancock Agricultural Investment Group
   2. American Society of Farm Managers and Rural Appraisers
   3. UBS – Agrivest
   4. TIAA-CREF Ag Investments

Located in Birmingham, Alabama, Tom Brickman has 37 years of experience in timberland investment and management businesses across the United States and Central America. He is a Registered Forester, Certified General Appraiser and Real Estate Broker, and helps people buy, sell, and care for rural land. Tom can be contacted via email at tbrick@CyprusPartners.com or by phone at 205-936-2160, and for more information on buying rural land in Alabama, you can visit Tom’s website at www.CyprusPartners.com.