Why Timberland Should Be On Your Watchlist
I was recently approached to be an investor in a lucrative deal involved timberlands in southern Vietnam…an entire 600 acre stretch of woodland filled with hundreds of beautiful acacias, eucalyptus, and firs.
But why timber?
Killing Two Birds With One Stone
Because timberland is a dual-class asset: real estate and commodity. In other words, there is both “timber” and “land” in timberland. Both are assets that can be sold for profit.
Now you’re thinking — timberland is like farmland, right? Well, not exactly, and here is why.
First, land value appreciates over time.
Between 1987 and 2003, US timberland property value has been compounding at a rate of 0.39% annually.
Yes, this is lower than your typical property’s rate. But don’t forget the second value proposition.
When trees (and therefore your supply of lumber) grow, the commodity volume expands, thus consistently appreciating in value regardless of the economy.
Douglas Fir trees, one of the most popular crops harvested for lumber, live for hundreds of years.
And when log prices are unfavorable for producers, smart investors will “hold” and let their forests (and products) continue to grow, waiting for a more favorable time to harvest and sell.
You can’t do this with other agricultural commodities. Even cotton must be harvested timely before the weather and growth cycle invariably damages the commodity’s value.
Have I mentioned that lumber price has appreciated nearly 500% since the 60s?
Also, aggregate timberland value (property and timber) has returned on average 13.3% a year since 1987; this beats the S&P 500’s historical return of 8%!
In the U.S, the timberland segment enjoys enormous benefits from the IRS. The first efficiency level comes from the REIT designation, the second comes from state’s favorable tax regime (varies by states), and the third benefit comes from the federal government’s tax support.
And don’t forget…
If you are an outdoor enthusiast like me, woodland makes the best playground for camping, hunting, and building lasting memories with friends and family in front of views like this:
Inflation and Crises hedge
Timberland makes one of the best hedges against inflation, as it has consistently outperformed inflation since 1963.
However, timberland goes even further. It has performed better than stocks and long-term US treasuries as an inflation-hedge in terms of consistency, historically.
Timbers and forestry stocks (NASDQ: WOOD) has also strongly beaten inflation-protected bonds (ARCA:TIP) in the last decade…
…And in the last 90 years, timberland value always shines in time of market crises.
However, what is more important to investors is how an asset performs relative to other assets so appropriate asset allocation can be made. Based on the table below, timberland vastly outperform gold, a very popular “disaster-hedge” investment, by over 2 times:
US Housing Construction is the largest global market for timber.
Since the 2009 housing bear market, US Housing Starts and Building Permits have been on a path of recovery, yet growing at slower pace than consensus forecasts.
However, over the long-term, there is still substantial growth potential in the US, as recovery is still far from its 2005 peak.
Our proprietary CIC Model, which tracks CAPEX change and consensus of producers, indicates increasing investments and positive sentiment from upstream producers in the US.
This represents a tailwind for timber price in the future, as loggers are anticipating an improving price movement, which will create a sell-fulfilling prophecy by pushing price of the commodity higher.
I’ve touched on this theory a while ago.
In regards to supply, the Pine Beetle Epidemic continues to ravage Western Canada, causing a log shortage that drove lumber price to a five-year-high in May of this year.
And this problem doesn’t seem to go away soon.
In the last beetles attack, the epidemic lasted for years and at worst damages 58% of Canadian pine volume. This beetle epidemic represents a significant problem to lumber producers.
Here is the catch: It would take from 7 up to 50 years for new crops to grow to the right size. We see another tailwind for timber prices.
How to Profit
You can purchase timber land directly from your local or regional real-estate brokers and hire a consulting forester to manage your investment.
Another option is to purchase shares in timberland REITs. This investment will be less volatile, and it requires less maintenance than the other options.
Weyerhaeuser (NYSE: WY) is one of the world's largest owners of timberlands, with over 12.4 million acres of timberlands in the U.S. and Canada.
This German company has a market cap of US$16.7 billion and generates about US$7.2 billion in net sales annual with a trailing P/E of 15.8.
Its industry-leading dividend yield of 5.86% and high payout ratio of 88% makes the company an attractive shelter for investors in recessions as well as for long-term income seekers. Weyerhaeuser’s one-year trading range is between $22.12 and $38.39.