WHY INVEST IN TIMBERLAND?

UNIQUE CHARACTERISTICS

Aside from offering competitive risk adjusted returns and portfolio diversification, timberland is endowed with several unique characteristics that institutional investors may find attractive. These characteristics are (a) continued accretion of value due to the biological growth of trees, (b) long-run adaptability to a range of investor needs and circumstances, and (c) tax advantages for certain individuals.

Benefit of biological growth

A unique advantage of timber is that as an asset it grows—quite literally. Trees grow in volume, size, and ultimately into increasingly higher-valued products. For example, in the US South individual trees begin as lower-value pulpwood, grow into a combination pulpwood/sawtimber tree (9 to 12 inches in diameter), normally referred in the timber trade as “chip-and-saw”, and then into sawtimber (trees that are generally greater than 12 inches in diameter and of a high quality) for lumber products. As a tree grows into these larger and higher product classes, the monetary value of the tree increases as well. The negative impact of the time value of money and the risk of negative returns can be offset by the increasing volume and value of the asset. In short, the effect on investment return by possible downward movement in timber prices is mitigated by volume growth; the effect of upward price movement is compounded by volume growth. In addition, over the life of the investment, timber continues to grow although at a slower rate as trees mature. This allows the investor to “warehouse” timber “on the stump,” giving the investor greater opportunity to time the sale, or harvest when prices are high and delay harvest when prices are low.

Timberland portfolio structuring to produce specific investment objectives

Timberland investment portfolios can be structured to meet different investment objectives. For example, higher cash flows can be achieved by including a higher proportion of more mature timber holdings. If long-term gains are more important than regular cash flow, then this goal can be achieved by acquiring young pine plantations with high growth rates and enhancing the benefits of biological growth through intensive management techniques. If the investors’ objective is a balance of intermittent cash flows with an emphasis on long-term appreciation, various timber age classes can be included in the portfolio to achieve this goal. In addition, investment returns can be improved with a variety of structuring and management options including the use of leverage, selling selected properties that have real estate development potential or recreational use value, or possibly using the asset to support the issuance of asset-backed securities. In short, timberland investments have the versatility to be shaped through financial engineering to meet a variety of goals for the sophisticated investor.

The tax advantage of timberland for individuals

For individual investors, timberland ownership offers tax advantages where income from timber and timberland sales can generally be treated as capital gains. In addition, there are specialized tax deductions and credits that can be utilized for conservation easements, reforestation, and timberland management practices.