Buy Forests

Forest investment outline

2008-11-06T10:50:00.000-08:00

A Forest Investment Outline

John Gordon and Richard Howard

I. Forests as investments

· Punch line: buy low, buy direct (see part III). Right now (late 2008) it is easy to pay too much, we think, for forestland. Small, well-located parcels that can be owned by a single retail investor are at or near all time high prices in most places, foreign and domestic. But it is still preferable, usually, to own your own land without an intermediary and the attendant fees and risk of poor management.

· Always evaluate real estate development potential. So-called “higher and better use” (HBU) is now priced into most US forestland. The savvy investor strives to understand how much this contributes to the sale price and how realistic the expectation is. In places of great beauty and recreational potential, ready access and closeness to cities HBU can be real. For many millions of acres of forestland without those attributes extreme caution regarding imputed HBU values is warranted.

· Be wary of pooled funds. The major issues are fees, control, and buying a pig in a poke (with or without lipstick), meaning the land is purchased after your money has left home. With forests it is mandatory to know exactly what you are buying.

· Forest appraisal: art or science? Forest appraisal is an excruciating blend of art, science and guesswork. Truly comparable sales are often scarce, future timber prices are hard to predict, and see “HBU” above. Unless you are completely satisfied with inventory and location stay far away from a potential investment, regardless of the appraised price.

· Look at arguments in favor of investing carefully: long term timber and land price appreciation vs. your or your fund's investment period (often fairly short term). For example, the last year has seen lumber prices approximately halved in the Pacific Northwest. “Leveraged” forestland (purchased with a large debt component) often forces owners to sell into a down market to service the debt, meaning that you are “averaging down” on timber prices for the life of the investment.

· Analogy with the stock market seems to hold with forestland, with fairly high returns over the long term, but in the long term we are all dead. Be very realistic about how long you will own the land. The “grandchild” test isn’t a bad one: can you envision the investment period lasting until your grandchildren are your age? Even “intensive culture” forests are relatively slow in comparison with a human life span.

· Major ownership changes in industrial forestland ownership seem mostly to be over, at least in the sense of the large, vertically integrated companies selling off their land. Now REITS (real estate investment trusts such as Plumb Creek and Rayonier), TIMOS (timber investment management companies, such as Hancock and Forestland Group) are major owners, but for how long? How will the market be when you want to sell? Will they be selling too?

· Forest investments make money and lose money, just like other investments. The returns reported for the TIMOS (above) have fallen steadily for a decade.

II. Managing forests as investments

· Initial condition and price are the key to selecting good investments. The amount and timing of in-growth (the timing of trees “growing in” to a higher value category), species and tree quality, growth rates/site quality, risk from weather, insects, disease and fire, access, proximity to a variety of markets, and, particularly, the regulatory and tax environment which varies by countries, states and counties. Reliable LOCAL information is essential, particularly for the regulatory and tax matters.

· “Bookends” for styles of forest management are 1)very intensive management (high capital investment, high and fast gross returns) or 2)very extensive management (just cut trees, relying on natural regeneration), providing lower (and often slower) gross returns but much lower investment and carrying costs, which can reward this “extensive management” with net returns that are higher than the intensive kind. All gradations of “management intensity” are observable and available to investors. The key here is to avoid the “fallacy of the middle”: relatively high initial investment, modest growth, a long time to carry up-front costs and concomitant low returns.

· Plantations tent to have high initial cost, and faster growth. With more invested early, more is at risk longer than in naturally regenerated forests; but returns per unit time and area can be much higher than natural forests, particularly if the plantations produce a high value added product (veneer for example).

· For natural forests it is imperative to know merchantable volume now and in future, ease of regeneration, and, particularly, regulatory risk. Basically, “regulatory risk” means will some governmental body or social convention keep you from cutting and selling your trees when it is time to do so.

· Sustained yield and certification schemes can work for the investor to reduce market and regulatory risk. Buying the right forestland at a reasonable price and engaging the competent managers with deep local knowledge of forests, regulations and markets is the right formula.

III. How to invest in forests

· Make forest investments fit your own specific time and life style goals and fit them into your overall investment portfolio or picture. It is easy to “fall in love” with a piece of forestland. When that happens, make sure your head as well as your heart is engaged in the evaluation process. There is nothing wrong with owning forestland because you like it. Just don’t confuse that with making money.

· Pooled funds vs direct ownership: pooled funds have "experts" who buy the land, but they buy it with cash in their pocket (moral hazard); direct ownership more work, but more control and higher returns with lower fees are possible if you want to do the work

· REITS, TIMOS and limited partnerships: pay careful attention to management fees and the role of the managing partner; know what was paid for the forestland when acquired versus market rates when you buy in; know the time horizon for real gain.

· Integrated (forestland owning) forest products companies: you buy the whole company (board, management, factories, liabilities, etc) not just their land and its products; you benefit from value added to wood by company activities in so far as it is reflected in their stock price and dividends.

· Invest where valuable trees grow readily, not necessarily rapidly since competition with brush and weeds often limits regeneration and growth where trees grow most rapidly.

· Invest in accessible land (good existing roads) with high site index value (good soils and microclimate)

· Assess "natural" risks before buying: insects, disease, fire, ice, wind

· Assess political risks before buying: environmental and transportation regulations, political attitudes toward the timber business.

· Above all, learn all you can, get the best impartial advice, and look for a "premium to knowledge"; forests are the least well understood major asset category.

· Initial price and condition are key to future gains or losses, but good price and condition alone do not guarantee success: management, politics, markets, larger world forces such as demographics and wars profoundly affect all long term investments, including forests.

Timber REIT Rayonier Pays Steadily Increasing Dividends

2008-07-17T05:22:00.001-07:00

Rayonier (RYN), a forest products real estate investment trust (REIT) with three core businesses, has a history of raising its regular quarterly dividend. Its regular quarterly dividend has increased from 8 cents in March 1994 to 50 cents in June 2008. More...

S&P Global Timber & Forestry ETF Includes Dividend-Paying Forest and Paper Products Stocks

2008-07-03T06:06:00.001-07:00

S&P Global Timber & Forestry (WOOD), an exchange-traded fund (ETF), includes 25 of the largest publicly-traded forestry, paper products and paper packaging companies. Top holdings include: Plum Creek Timber (PCL), Rayonier (RYN), Sino-Forest (TRE.TO), Weyerhaeuser (WY), OJI Paper (3861.T) and West Fraser Timber (WFT.TO). More...

Put Domtar on Your Stock Watch List

2008-07-01T08:47:00.001-07:00

As the stock market continues to the downside, it creates some great bargains. One such company is Domtar (UFS), a large paper and pulp company with operations in the U.S. and Canada. More...

Forestry 101 for New Investors, Part 3.

2008-02-26T08:32:00.000-08:00

“And there is more complexity to come in Part 3, when we finally get down to plantations versus natural forests as investments. Genetics, regeneration, insects, disease and fire will all appear in our forest investment future.” That is where we left it at the end of part 2. So brace yourself for complexity and uncertainty. Forests contain plenty of both. We will talk about the genetic makeup of trees, and the classic threats to forests: insects, disease and fire separately, but they all interact, they all leave a historical signature in any group of trees, and they are all complicated subjects in themselves. Indeed, the central notion necessary to invest in forests is that they have more components per unit area than a space ship, and the pieces are all connected.

Often when I talk with people who are new to forestry and the workings of forest, I find their main concern is potential destruction of the forest by fire, insects and disease. These are very real threats. In dry areas, or seasons, fires started by lightning or people are constant threats to a forest’s existence. Most of the time, plantations of trees are established so that, among other things, they are easier to protect from fire than natural forests. This is because they include roads, fire breaks and have firefighting capability nearby. These same attributes mean insect and disease outbreaks are easier to combat. But where plantations are of non-native species they may be at special risk from local diseases and insects. As the biological contents of the world are increasingly shuffled around by human activity, the threat of new bugs and diseases to existing forests, planted or natural, increases. All that having been said, losses of planted forests to these agents is relatively small, way less than 1 percent per year on a world scale. Extensive, remote natural forests in remote areas are another matter. In the western United States and Canada, losses to fire and the others have been large and increasing for the last few years. Some blame this partly on human-caused climate change that makes some areas warmer and drier in the summer.

So what is an investor to do? First, make sure that the people who manage the plantations and forests you invest in have thought long and hard about these influences, and that they take proactive measures to prevent them from destroying the investment. That having been done, look for relatively wet places (for example the Pacific Northwest, of North America, west of the mountains) and species with good track records of insect and disease resistance (for example, Douglas-fir and associated species).

The genetic make-up of individual trees and forests determines how they respond to their environment, including fire, insects and disease. Over the last 50 years or so a lot of time and effort has been put into “tree breeding”, attempts to produce genetically better trees. These improved trees grow faster, and may be more resistant to insects and disease. In North America, the chief species worked on in this way have been Southern pines, Douglas-fir, and poplars, but many more species have had some level of attention. The main thing here is that these improved trees are grown from seed or vegetative tissue of their parents in nurseries and then planted in the field, so that they only appear in plantations of one kind or another. So if you want to benefit as an investor from this vast effort, you will need to invest in plantations. However, the future of all forests is determined to some considerable degree by their genetic makeup. Thus, if in natural forests only the best trees are cut and poorest left, the genetic makeup of the forest can be impaired. So how forests are managed can be a form of genetic improvement, or at least “genetic maintenance”. Ask the managers of your investment forest whether they practice “high grading”, particularly in the mixed forests of the Eastern united states and watch their reaction.

On September 15, 2007 the National Commission for Science and Sustainable Forestry (NCSSF) released "Conserving Biodiversity Through Sustainable Forestry: A Guide to Applying NCSSF Research" to highlight the practical significance for practitioners and managers of the research the organization has sponsored on biodiversity and sustainable forestry. The fully illustrated Guidebook offers practical tools to apply science in the field and is accessible for anyone interested in forests and the practices associated with forest management. The goal of this publication is to help improve forest management by making forestry and biodiversity science easier to understand and illustrating on-the-ground applications. This is about the most accessible source for a fuller story that you will find. Go to www.ncssf.org to get a copy.

Timberland Returns Are Mixed But Still Beat Stocks

2008-02-20T07:13:00.000-08:00

Some investors have diversified their investment holdings with timberland because in recent years timberland has tended to outperform stocks. But is buying and selling timberland always more profitable than buying and selling stocks? To help answer this question, I (RAH) examined the annualized returns for timberland and stocks from 1987 to 2007, using annualized returns of four holding periods (5, 10, 15 and 20 years) as the measure of performance.

Timberland values were measured using the NCREIF Timberland Index and stock values were the closing values of the S&P 500 for the last day of each year from 1987 to 2007. To learn how I computed the timberland index and annualized returns, see the companion spreadsheet.

More...

Silvics of North America

2008-01-04T16:46:00.000-08:00

Silvics of North America describes the silvical characteristics of about 200 forest tree species and varieties growing in the United States and Puerto Rico. The handbook includes Volume 1: Conifers and Volume 2: Hardwoods.

2008 Tree Calendar From Sean Kernan

2007-12-31T16:59:00.000-08:00

Among Trees is the name of Sean Kernan's 2008 black and white calendar with twelve wonderful photos of individual specimens and stands of trees from Hawaii to England. See his work at amongtrees.com.

Forestry 101 for New Forest Investors, Part 2

2007-12-30T15:31:00.000-08:00

Now that the major natural advantages and disadvantages of forests as investments are clear (growth, flexibility in marketing, good, long times, bad) we can be more specific, as Lilly Tomlin urged (she said that when she was young she wanted to be somebody, but later wished she had been more specific).

We talked earlier about natural forests and plantations. Both have trees as their major components, and both have the advantages and disadvantage above. Both need careful management to retain and increase their value as an investment. The science of forestry and its practitioners, foresters, aim to provide that careful management. Any investor should be very inquisitive about the quality of management his forest receives, and should insist on verifying the quality of his management organization and its people.

Natural forests have the advantage of being relatively plentiful, and usually offer an array of other benefits to society, such as protecting water sources and harboring wildlife. Plantations tend to be less diverse than natural forests in their number of kinds of trees, other plants and animals. Those with environmental concerns about wildlife and other "non-timber" forest benefits tend to like natural forests better than plantations. From an investment point of view, however, this interest can appear perverse. Environmentalists have traditionally given more grief to those trying to maintain and manage natural forests than to those managing plantations. Go figure. In any case, "environmental risk" needs to be considered by anyone investing in any forest. Will harvest of trees be prevented or reduced by concerns about wildlife or other environmental effects, for example pollution resulting from road building or intentional burning? Some forests and some parts of the world are more prone to this sort of environmental risk than others. Most forest managers have concluded that a systematic effort to reduce actual and perceived environmental risk is worth spending money on. They carefully monitor their own operations for environmental compliance and strive for continual improvement, often through "third party forest certification" systems. More on these later, but the prudent forest investor looks for managers and places that minimize environmental risk, or for managers that can work positively with high environmental risk and thus gain a competitive edge. For example, some forest investors/managers have been adept at buying environmentally risky properties at a discount and then making them perform well both environmentally and as an investment. People like this are often referred to as "green timber investment management organizations" or "green TIMOs". Later, this blog site will profile one or more of these.

Nowadays forests also can be viewed as "carbon sinks" because they can cause a net removal of carbon from the atmosphere and thus mitigate climate change caused by the burning of fossil fuels. Old forests hold a lot of carbon. Young, rapidly growing forests, including plantations, take carbon out of the atmosphere relatively rapidly, but may not have much net accumulation until considerable time passes. If and when trading "carbon credits" becomes widespread, this may be a major source of revenue from forests that can be shown to be reservoirs and sinks for carbon. Stay tuned.

A bit about forest productivity. We said forests use sunlight, carbon dioxide, water and nutrients (think nitrogen, phosphorus, potassium and a bunch of other things found in soil) to grow. As a tree grows it makes wood, and as bunches of trees (forests) grow, they make a lot of wood. How much they make per unit time depends on how much sunlight, water and nutrients the place the trees are growing supplies to them. This concept of supply is called by foresters "site quality". Good quality sites grow trees and wood rapidly, poor ones less rapidly. Good sites tend to have deep, fertile soils, abundant water (but not too much, with good drainage), plenty of sunlight and a long frost free period during which the trees grow actively. Clearly, good sites are better investments than poor sites, right? Well, that depends on two things: their price relative to their productivity and their ability to respond to management factors. For example, on some poorer sites the response to fertilizer is profound and, at the right price, they can then be better investments than the best sites, which tend to be high priced. In other places the availability of markets is critical. No matter how fast wood is grown, if there is no place to sell it isn't worth much. The lesson here is that deciding what forestland to buy is not as straightforward as one might think. New investors, indeed most investors, need a lot of advice and thought to get it right. A first rule of thumb might be, never invest based on a single outstanding property (high growth rates, for example) or a single source of recommendation. Beginning to sound like the stock market? And there is more complexity to come in Part 3, when we finally get down to plantations versus natural forests as investments. Genetics, regeneration, insects, disease and fire will all appear in our forest investment future.

Forestry 101 for New Forest Investors

2007-12-30T15:21:00.000-08:00

Years ago there was a cartoon in a leading magazine that summed up forestry for many investors. A clearly well-to-do grandfather was walking in the autumn woods with an attentive grandson. The caption had the grandfather saying something like, “Yes, it is good to know about trees. Just remember nobody ever made big money knowing about trees.” As forestry ventures get more attention as an investment asset class, it may be time to revise that opinion. Here are a few characteristics of forests and forestry (how forests can be managed) that can be important to investors.

First, from a “nature” point of view, investment forests come in two varieties. “Natural” forests are forests that the Germans had in mind when they coined the phrase, “no one has it as good as the forester, the trees grow by themselves”. They occur naturally and have had a wide range of human intervention, but will continue to be forests until a catastrophe or a determined human effort makes them into something else (a housing development for example). In many places, even when these forests burn in hot fires, they come back over time to cover the same area with trees. The other kind of forest, and one becoming rapidly more popular, is referred to as a “plantation” or planted forest. These may be on the site of earlier natural forests or on land that hasn’t had trees on it, at least recently. Each has contrasting advantages and disadvantages for investors, which we will describe in later articles.

Plantations and natural forests do share some investment characteristics. First, the trees in the forest are capital, or the means of production, and the product, at least when the desired product is wood for the market, which it most often is. When a tree grows, new wood is put on over the old wood in the trunk as the cells in a layer under the bark (called the cambium) divide and expand. This process is driven by photosynthesis, the sunlight- driven creation of carbohydrates in the leaves and the water and nutrients taken up by the roots. Thus, as the trees grow, both capital (the whole tree and whole forest) and product (wood) are increased. This is somewhat like having a factory that makes it own machines while making other saleable goods, and is one of the investment advantages of forestry. If no trees are cut, and the forest remains productive (more about this in a later piece), the forest goes on increasing in value because of wood growth and increased productive capacity, at least up to the limits imposed by the environment. So, unlike agricultural products which must be harvested when ripe, the forest owner can choose a harvest time that best fits the market and his objectives.

But when trees are cut and sold, both capital and product are gone, at least to the degree the trees are removed. Natural forests and plantations both vary greatly in the time it takes for trees to become large enough to sell. In most “commercial forests”, those intended to produce economic returns to wood production, this varies from a few years to a century. Almost invariably, however, it is a multi-year process, meaning that the initial amount invested has to be “carried” for a fairly long time, at an appropriate interest rate, before any return at all is realized. Thus if an investor purchases a natural forest just after most of the trees are cut, or a plantation at the time of establishment, some considerable amount of time will pass before any return on the investment is available.

So, in simplest terms, the natural advantage of forests for investors is that they grow continually if managed and protected, and marketing them can be done at any time after they are large enough to sell. The natural disadvantage is that they can take a long time to be ready to sell.

Clever investors will avoid conditions that make it necessary to sell at the “wrong” time (when the market is down or when maximum value growth hasn’t been achieved) and will minimize the ‘carrying time” until payoff by buying forests with trees nearer maturity or by investing in intensive practices that shorten the time the forest needs to grow before revenue comes in.

Later in this space we will discuss other aspects of forests that should interest investors, including differences between plantation and natural forest investments, forest productivity, wood and non-wood forest products, and structures for investing in forests.

Acadian Timber Income Fund Pays a Steady Monthly Distribution

2007-12-19T05:18:00.000-08:00

Acadian Timber Income Fund (ADN.UN.TO), an open-ended, limited purpose trust that manages forest land in New Brunswick and Maine, has paid a monthly distribution (like a dividend) of $C0.06875 since March 2006. Its current yield is 8.23%. More...

Forestry-Related Links of Interest

2007-12-09T17:23:00.000-08:00

Irish Timber and Forestry - Web site includes lots of timely articles about forestry in Ireland. Check out Investing in Forestry.

Irish Timber & Forestry magazine - bi-monthly publication.

Forestry Directory of Ireland - compilation of the forestry companies, agencies and practices in Ireland.

Timber Assets Investing - slick looking marketing site promoting timber investment. Pitches a free information package.

Rock Creek Timber Partners, LP - buys, manages and sells timberland for investors. The company is headquartered in Jacksonville, Florida.

Japanese Pulp and Paper Stocks

2007-11-27T06:48:00.001-08:00

The 14 Japanese pulp and paper companies presented here (table) give investors the opportunity to invest in the Japanese and Southeast Asian economies. The pulp and paper industry is extremely cyclical so the stock prices of these companies will rise and fall with fluctuating business cycles. More...

Votorantim Celulose e Papel Has Rewarded Its Investors But Be Careful

2007-11-19T07:56:00.000-08:00

Votorantim Celulose e Papel (VCP), a Brazilian pulp and paper company, is not a household name in the U.S., but the stock has made lots of money for its investors. Since October 2002 VCP has increased almost 700 percent. And it pays a healthy dividend yield of over two percent.

Currently CP is down from its all-time high after completing three upside phases. And the stock may have more downside before stabilizing. So carefully watch VCP before you buy it. Like most pulp and paper stocks, VCP is very cyclical so buy it at the beginning of a price cycle, not near the end of one.

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Wood Products, Paper Products and Timber Management Stocks

2007-11-19T07:52:00.000-08:00

Forest products (lumber, oriented stand board, plywood and more), pulp and paper and timberland management companies (real estate investment trusts and limited partnerships) give investors the opportunity to realize capital gains and receive income from dividends and other cash distributions. Forestry-related companies produce products that are always in demand and owning stocks in these companies lets investors benefit from a growing world economy.

These companies have cyclical businesses so their stock price follow a cyclical pattern. Often their cycles do not correspond to the cycles of other economic sectors, so forestry stocks can act to even out the performance of a stock portfolio.

Many of these companies pay safe dividends so their stocks are appropriate holdings in a long-term dividend reinvestment portfolio.

Click here for a comprehensive list of forestry-related companies.

For lists of the largest forestry-related companies see S&P Global Timber & Forestry Index Tracks 25 Forestry-Related Companies and World Timber Index (TIMBEX) Tracks Timber, Forest Products and Paper Stocks.

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S&P Global Timber & Forestry Index Tracks 25 Forestry-Related Companies

2007-11-19T07:48:00.001-08:00

The S&P Global Timber & Forestry Index includes 25 of the largest publicly-traded companies engaged in the ownership and management of forests and timberlands. These companies produce forest products, paper products companies and manage timberland.

Click here to see the components in the index.

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World Timber Index (TIMBEX) Tracks Timber, Forest Products and Paper Stocks

World Timber Index (TIMBEX) Tracks Timber, Forest Products and Paper Stocks

2007-11-19T07:30:00.000-08:00

The World Timber index (TIMBEX) by Dow Jones Indexes includes the 15 largest (market cap exceeds $500 million) liquid forestry-related stocks that are engaged in producing wood products, pulp and paper products or forest land ownership (REITs). TIMBEX is market-cap weighted with no one component exceeding ten percent.

The index is useful to investors because the components are established companies with capital gains potential. And many of them pay safe increasing dividends.

But the lumber and pulp and paper industries are cyclical and so are the stock prices of forestry-related companies. So before you buy any of these stocks, be sure to study their price charts. Always buy at the beginning of price upside and avoid buying at the cyclical tops. And avoid buying on the downside of the price cycle.

Click here to see a table of the TIMBEX components.

For more information about the TIMBEX see TIMBEX current components by weightings (.pdf file) and TIMBEX brochure (.pdf file).

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Portfolio of Paper and Paper Products Stocks
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Sino-Forest Is a China Play

2007-11-19T07:28:00.000-08:00

Sino-Forest (SNOFF.PK), a Canadian and Hong Kong-based company that has forestry operations in China, has rewarded its shareholders. The stock has had three upside phases since 2006 yielding a five-fold increase in its price.

The company owns forest plantations from which it cuts tress for China’s pulp and paper, furniture, construction and interior decoration industries.

Like many Chinese stocks, Sino-Forest has experienced an extended price appreciation so be careful with it.