Timber investor Adam Nash discusses the benefits of investing in timber.
NuWire: Tell me about your background. How did you get involved in the timber industry?
Nash: I'm not personally involved in the timber industry; I follow it solely as an individual investor. I was introduced to the asset class in 2001, while studying for my MBA. I was fortunate enough to take a class in private equity where Dave Swenson, head of the Yale endowment, gave a lecture. Dave is famous for his outstanding returns leading the investment of the Yale endowment over the past 20 years. During his lecture, he talked about his strategy of asset allocation outside of the typical asset classes of U.S. stocks and bonds. One of the asset classes he discussed were "real assets", which included timber. Based on his presentation, I began to look more seriously into other asset classes, like timber, and have been a personal investor in timber for about five years.
NuWire: Are you personally invested in timber? In what way?
Nash: I currently have a percentage of my retirement assets allocated to timber. To date, I have only used publicly-traded vehicles, like timber REITs, for this investment.
NuWire: What are some of the benefits of investing in timber?
Nash: In many ways, investing in timber is a dual-investment in two very real assets: real estate and timber itself. Real assets tend to grow in value with inflation, so they are almost naturally inflation-protected. In actuality, because of ongoing development and environmental limitations, the availability of quality timberland is increasing in value. The complexity of regulation has put a specific premium on large organizations with the resources to manage the legal requirements of owning, developing and harvesting timber in the U.S. and in foreign markets.
Owning and harvesting timberland is fundamentally a classic fixed-income investment. For example, imagine a type of tree that takes 50 years to mature to full growth. You can easily imagine owning 50 acres of growth, and harvesting one acre every year on an ongoing basis. Since for the most part, timber grows based on naturally provided sun and water, the land effectively acts like your principal, since it will be there when you are ready to sell the investment. The timber itself acts like a perpetual coupon.
My favorite fact about timber, however, is the non-linearity in the value of a tree. Trees continue to grow every year, regardless of whether or not the price of wood is low or high. Since large trees are worth disproportionately more than smaller trees, timber owners always have the option of "waiting out" a soft market in timber prices. Gold, for example, does not grow naturally in the years you hold it. Trees do. As a result, by waiting out soft markets, the timber investor can reap additional rewards when they eventually sell their now larger tree into strong timber prices.
NuWire: What are some of the risks involved with timber investments?
Nash: In the short term, like most commodities, timber prices can fluctuate in value due to changes in supply and demand. Trade disputes between countries like the U.S. and Canada can significantly affect the short-term value of timber.
Additionally, most individuals will not have the resources or expertise to own timberland directly. As a result, investors are always going to be acting through intermediaries, like a trust or a REIT, and there are agency risks with all intermediaries.
NuWire: What are the main ways investors can get involved with timber?
Nash: Until a decade ago, the only way for individuals to participate in the timber market was to join a small partnership, likely with a minimum investment of $250,000, that would purchase and manage timberland. In the late nineties, REITs like Plum Creek Lumber (Ticker: PCL) were formed to allow a direct ownership in the timber business, with many of the tax benefits previously available only to partnerships. (Disclosure: I own shares of PCL). With dividend reinvestment offered by many brokerages, it is now perfectly viable for an individual to effectively own timber with as little as a few hundred dollars.
NuWire: How has the timber industry changed over the years?
Nash: I am not an industry expert, but to my knowledge, the two biggest changes in the industry in the past 20 years are likely the changes in operating structure for timber ownership to large, pure-play corporations like Plum Creek Lumber. Previously, most timberland was either owned as part of the assets of paper companies or in partnerships. The second large change has been the ever-increasing amount of development and environmental regulation around timber and wildlife management, putting a significant premium on operations that have expertise in managing the incredible legal issues around owning and harvesting timberland.
NuWire: What do you think about the recent trend toward timberland REITs? Do you see this as a positive sign for the industry? Why/why not?
Nash: I think the move to timberland REITs is excellent for several reasons. From an operations standpoint, pure-play organizations around the unique issues around owning, developing and harvesting timberland is better served in stand-alone entities, not as part of a large conglomerate (like a paper company). REITs provide many of the tax benefits of partnerships, with the added benefit of publicly documented financials and accessibility to individuals.
NuWire: How do the dividends for timberland investments compare to other investment dividends? How competitive are they?
Nash: The dividends from timber REITs can be misleading because they tend to be capital gains distributions rather than normal dividends. Historically, they will fluctuate with the price and demand for timber, so they can be less regular than the dividends from a normal operating company. Because timber investments tend to be a combination of real estate and timber holdings, it can actually be beneficial to a company to lower harvests and sales when the market is soft.
NuWire: What tips would you recommend for people wanting to invest in timber? What should people be aware of?
Nash: Timber REITs are publicly-traded entities, so their financials are easily available online. People should read some of the available literature about these corporations, and about timber as an asset class, before investing.
