• Timberland As An Investment
   
• Why Should You Invest in Timberland?
   
• Experience & Expertise
   
• Transaction Development
   
• Acquisition & Sale process

Timberland Investment and Returns

Part 1: History
Individuals and forest products companies have been investing in forestland for close to a century. However, over the past 15 years, timberland has become a bona fide investment used to enhance a market portfolio. Forest investments of today provide strong returns and have a low risk to return ratio, generally being negatively correlated to the stock market. Biological timber growth provides a hedge against price fluctuations, while acting as a "bank"- earning interest through growth. Past market imperfections that made forestland illiquid are being corrected with the increased prominence of forestland as an investment. The perceived riskiness of forestland investments is diminishing as well documented forest investments provide returns to investors.

Part 2: Where do forestland returns come from?
Returns from a timberland investment are composed of five elements; biological growth, upward product class movement, timber price appreciation, land price appreciation, and management/marketing inputs.

Biological Growth
The biological (physical) growth of trees makes up most of the returns to a forestland investment. Biological growth ranges from 3% in an unmanaged natural stand to 12% in an intensively managed highly productive plantation, with the average ranging between 6-9%. Product Class Movement There are two basic products derived from a tree; pulpwood and sawtimber - sawtimber being about four times the value of pulpwood. As a tree grows, more of its volume is allocated to sawtimber, thus as a tree grows, volume growth, as well as product upgrade is adding value.

Timber Price Appreciation
The South's forest resource is already under harvest pressures with levels exceeding annual growth. According to Resource Information Systems, LLC (RISI), the nominal price of southern sawtimber and pulpwood have risen at an annual rate of 7.5% and 6%, respectively from 1988-1998. RISI has forecasted sawtimber and pulpwood prices to react strongly to the competitive pressures on the South's timber resource.

Land Price Appreciation
Since forestland prices (like agriculture land) is derived from the discounted future cash flows from that land, as timber prices increase, so do land prices. Advances in technology, genetics, competition control, and fertilization also increase the productivity and cash flows from a forest - increasing the underlying land value. Southern forestland values have increased at a rate comparable to that of timber over the past 10 years.

Management/Marketing Inputs
Management and marketing expertise is extremely important relative to a forestland investment. From the initial investment choice to the timing of timbersales or tree growth manipulation practices (i.e. fertilization, competition control, thinning), to the eventual sale - expertise is paramount.

Part 3: Risks to a Timberland Investment
There are three basic risks associated with a timberland investment; making a poor quality investment, natural disaster, and price or market risk.

Poor Quality Investment
A high purchase price can significantly reduce returns. For every $50 per acre increase in the purchase price, average returns decline by 1% for commercial timberland. Other factors, such as poor site productivity and poor local market conditions rarely can be overcome.

Natural Disasters
Forests are subject to the forces of nature. Wind, fire, flood, and insect damage are potential risks to a forestland investment. These risks can be minimized by purchasing insurance, or diversifying a timberland investment over several geographic, market, and age conditions. The U.S. Forest Products industry reports less that 1/2% value loss per year from natural forces.

Price Risk
Stumpage (standing trees) prices are volatile, as well as seasonally cyclical; however, less so than lumber markets. Since trees grow, regardless of market conditions, these downturns can be "ridden out". Also, the value of a tree is made up of two (at least) products, pulpwood and sawtimber; whose prices don't move in unison.

Part 4: Timberland in the Portfolio

Timberland investments compliment a portfolio. Timberland investments provide low volatility, diversification, and strong returns.

Low Volatility
Returns from tree growth dampen swings in returns due to outside forces.

Diversification
Timberland is negatively correlated with other components of the portfolio.

Strong Returns
Timberland alpha is high. Rogers, Casey & Associates' efficient frontier analysis indicates that adding timber to a stock and bond portfolio can significantly increase returns while lowering risk.

Conclusion: Expected Forestland Returns
Timberland produces rates of return based on biological growth/product upgrade, land and timber price appreciation and management/marketing inputs. Biological growth and product upgrade are dependent on age, site productivity, stand type and condition, and silvicultural inputs (thinning, fertilization, and competition control). Long term land and timber price appreciation is dependent on international, domestic, and local market conditions, as well as, international trade tariffs, and environmental regulations. Short term timber price increases may be caused by wet weather and local mill consumption. Once the investment is purchased, management/marketing inputs provide returns to the timberland by timing timber sales with peak market conditions, performing stand growth enhancements, and carrying out day to day timberland management. The Southern timber market can be broken down into two general market types; the Southeastern Piedmont/West South Pine Sawtimber Market and the Southeastern Coast/Florida/Gulf Coast Pine Pulpwood Market. The demand for pulpwood is strong in the coastal markets due to the number of pulp and paper mills located near the coast. Moving inland, pulpwood demand weakens while sawtimber markets strengthen. The following two charts illustrate the returns that can be expected from intensively managed pine plantations in both market areas. The dynamics of each market are reflected in the shape of the curve. Strong pulpwood markets favor shorter rotations where the net present value (NPV) is maximized by the time the stand is 20 years old. While strong sawtimber markets favor longer rotations where the NPV is maximized between 20-30 years. The returns shown are year to year returns (by age) broken down into the five elements of returns; biological growth and product upgrade (combined), land price appreciation, timber price appreciation, and management/marketing inputs. These returns do not reflect any costs or taxes associated with owning timberland. Management costs vary depending on the forest condition, but will average about 2% per year. Fund and investor tax situations will vary tremendously.


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