Timberland can be a promising new territory for your investment portfolio
By Rebecca Lake, Contributor Sept. 7, 2018, at 9:35 a.m.
“MONEY DOESN’T GROW ON trees” is a popular adage but timber investors might disagree. Timber investments can bring consistent growth to your portfolio.
“Whereas certain assets like cash and bonds can periodically diversify a portfolio away from stocks, they do so at the expense of overall returns,” says Patrick R. McDowell, investment analyst at Arbor Wealth Management in Miramar Beach, Florida. “Timber has been a superior complimentary asset to stocks over the last 40 years.”
Between 1993 and 2017, U.S. timberland investments delivered average returns of 8.36 percent, as measured by the National Council of Real Estate Investment Fiduciaries Timberland Property Index. The S&P 500 index produced only slightly higher returns of 9.69 percent over that same period. Overall, timber investments outperformed hedge funds, high-yield bonds, corporate bonds, long-term and intermediate U.S. government bonds and U.S. Treasury bills.
Timber investments prove less volatile than stocks, private equity, farmland and commercial real estate. Additionally, timber tends to have lower correlation to stocks, bonds and real estate and is less sensitive to economic and market shifts, making it attractive when inflationary pressures mount.
“Timber is a renewable natural resource with applications as a long-term inflation hedge – research has shown that out of all the major hard natural resource asset classes, timberland has the highest correlation to inflation – and for diversification as a traditional late-cycle asset class allocation,” says Mark Carlson, senior investment strategist at FlexShares in Chicago. “Natural resource equities historically perform well late in the economic cycle.”
Investing in timber also affords an opportunity to pursue a socially responsible strategy. A 2016 Forest Trends report found that sustainable timberland investments accounted for 34 percent of all private conservation investments between 2004 and 2015.
As an investment, timber “fits beautifully into the growing outlook for sustainability and the ever-growing demand for housing, paper products, furniture, etc. worldwide,” says Pablo Solomon, award-winning green designer.
Here’s how to get started with timber investing.
Consider the direct route. There’s more than one way to invest in timber and one path may be a better fit than another.
Stacy Caprio, stock specialist at Fiscal Nerd, advocates direct ownership of timberland.
“Consider buying physical plots of land versus purchasing shares in timber companies,” Caprio says. “Timber is a valuable asset and doing this will give you control over the assets and what to do with them.”
Caprio acknowledges that owning timberland entails greater responsibility for its management but says “having a direct hand in how the timber is used will let you be able to control investment outcome better.”
Solomon says hiring a lumber company to oversee management can ease some of the burden of direct ownership. He says that unlike holding stock, “the property is usually growing in value and you can actually live on it and enjoy it recreationally.”
Owning timberland directly typically requires a longer investment horizon. Solomon says in the case of pine trees, it can take about 30 years for most pines to reach harvestable size. The advantage is that an acre of pines will yield about $1,500 to $2,000 to the grower.
“The idea is to have enough acreage to have a never-ending rotating harvest,” he says.
Buying timberland can also yield additional return potential if you’re harvesting more than wood. Some of the most expensive hardwoods – such as walnut or pecan hickory – can also produce edible nuts.
“A good pecan tree can yield hundreds of pounds of pecans per year and average $2 per pound to the grower,” Solomon says. “While the number of pecan trees per acre may vary, the average yield per acre is around a thousand pounds.”
In addition to selling to lumber companies, trees can be sold locally to nurseries or landscapers. Dead wood and debris may have use as firewood or mulching material, adding to investors’ profit potential.
Stake your claim with REITs and ETFs. Real estate investment trusts and exchange-traded funds may be more attractive if you don’t have the means or inclination to purchase a timber farm.
In 2017, timberland REITs, which specialize in harvesting and selling timber, generated a total return of 21.92 percent, according to the National Association of Real Estate Investment Trusts. Through the end of July, dividend yield for timberland REITs was 3.64 percent.
On the ETF side, “access can be accomplished through funds that concentrate on timber and paper companies, along with ancillary suppliers, or through diversified natural resources funds,” Carlson says. He says there are futures available on lumber, however, “the futures market is limited to near-term contracts and generally does not allow for strategic long-term investing in the sector.”When choosing timber REITs or ETFs, or timber investments in general, don’t skimp on due diligence.
“Not all natural resource classified companies offer exposure to natural resource price movement,” Carlson says. Packaging companies, for example, “are often classified as forest product or paper companies, but have no ownership of timberlands, making them a price taker, not a price driver.”
Comparatively, the FlexShares Global Upstream Natural Resources Index Fund (ticker: GUNR) seeks exposure to companies with direct ownership or lease rights to the natural resources in the ground, “which result in their revenues, earnings and cash flows and therefore their equity valuations and returns being driven by the prices of natural resources,” Carlson says. “This results in a better correlation to inflation as those natural resource prices make their way through the economy in the form of housing, fuel, food, etc.”
Don’t limit your horizons. Considering only timber REITs or ETFs may mean missing the forest for the trees, McDowell says.
He offers advice for investors who want to own timber with the dual goals of earning similar returns to stocks while diversifying away from stocks.
“You want to find individual assets that are very reasonably priced that will provide you similar long-term timber returns without paying a premium,” McDowell says.
McDowell uses Keweenaw Land Association, Ltd., a land and timber management company Arbor Wealth Management is a shareholder in, as an example of an individual stock that fits that mold.
“By our valuation, investors today are essentially buying the timberland at cost and getting upside potential from three things: potential REIT conversion, mineral rights development and potential sale of whole company,” McDowell says. “If none of those things happen, we still own timberland at cost which should roughly mimic overall timber performance over a decade long time frame.”
In the meantime, the outlook for timber investments remains positive.
“We expect timber assets to produce anywhere between 5 to 10 percent annually on a go-forward basis,” McDowell says.