Jake Schutt of Wilmon Timberlands in Alabama discusses timber investing and trends.
NuWire: Tell me about your background. How did you get involved in the timber industry?
Schutt: In 1954, my grandfather made the original investment in timber for our family. This was done at the time in partnership with International Paper, the Hollingsworth Whitney Paper Co. and several other family members. My grandfather not only believed in timber, but was also passionate about the people of Wilcox and Monroe Counties and beyond. Today, my family still actively participates in the business.
NuWire: What are some of the benefits of investing in timber?
Schutt: The most common benefits of timber ownership are:
1. Diversification from traditional asset classes
2. Lower standard deviation than the S&P 500
3. Capital preservation; timber is viewed as an inflation hedge
4. Low capital reinvestment requirements
5. Consistent and predictable cash flows
6. Harvests can be deferred if prices are low, yet trees continue to grow into more profitable product categories
NuWire: What are some of the risks involved with timber investments?
Schutt: The most common risk investors face is purchase price; that is, the amount they pay for the property. Because timberland valuation is subject to appraisal methodology, some risk lies in underlying assumptions associated with that methodology. In addition, there is manager selection risk. If the property is not managed effectively, future growth can be stunted and harvest schedules can be lengthened unnecessarily. Other risks include acts of nature like fire, hurricane or insects. If you are investing internationally, additional considerations include political and currency risks.
NuWire: What are the main ways investors can get involved with timber?
Schutt: The easiest way to get involved with this asset class is through the purchase of Timber Real Estate Investment Trusts (REITs). You can also purchase paper and packaging companies, but this is a more indirect form of timber ownership. After the public markets, investors can pool assets with Timber Investment Management Organizations (TIMOs). These are LLPs with pooled ownership of timber properties. Depending upon the TIMO, assets will typically be deployed in various U.S. markets and international markets as well. Finally, investors are able to purchase timberland directly in single name, LLC structures or trusts.
NuWire: According to your website, your company helps institutional investors as well individual investors buy and manage timber investments. Can you explain what a typical individual’s investment might look like?
Schutt: The type of investor we typically deal with is a high net worth family who appreciates the long-term nature of timber ownership. They like the diversification—knowing that, no matter what, the trees are always growing. They like the predictable nature of the income stream and believe in active forest management. The investment may range from 1,000 to 5,000 acres or more. The majority of that land will be spread out regionally and will primarily consist of southern loblolly pine with some streams and hardwood “bottoms” running through it.
NuWire: What is the minimum investment size that an individual investor would need in order for your company to work with them?
Schutt: One million dollars.
NuWire: Historically what kind of returns on investment have your investors experienced?
Schutt: Investment returns have averaged 8 to 10 percent.
NuWire: What is the typical length investors hold on to these timber investments with your company?
Schutt: I think clients should consider holding timber for 10+ years. Our clients, however, have a much longer time frame in mind, typically 25 to 30 years.
NuWire: How is the current market for timberland sales?
Schutt: The price of timber product categories fluctuates. However, the underlying land has steadily increased over the past 30 years with significant appreciation in recent years.
NuWire: Where do you see this market going in the future?
Schutt: The long-term trend for the industry is favorable. From a land perspective, there are two trends supporting valuation. The first trend is that the U.S. South and the Pacific Northwest will continue to be the most important industrial forest regions in the U.S. The second trend is a healthy demand for recreational (hunting and fishing) properties in the U.S. South. These two trends, combined with growing demographic requirements in the U.S. as well as globally, point to a favorable future for investors.
NuWire: Of all the different ways one can invest in timber, why would they want to invest with a company such as yours? What are the main differences between the modes of investment in timber?
Schutt: Direct timberland ownership provides absolute control. When you purchase a REIT or are an investor in an LLP, you are lumped in with other investors and have little to no control over the underlying investment. In both of these cases, managers make unilateral decisions without regard to individual circumstances—the very nature of these investment structures prohibits custom decision making. With direct timber ownership, the investor can defer harvests if they don’t need the money, tailor cuts for cash flow purposes or accelerate cutting schedules to take advantage of temporary price spikes. In addition, direct ownership can be more advantageous from a tax perspective simply because high net worth clients can actively manage this asset as they do any other investment in their portfolio.
Wilmon has a long history of operating in the region. This translates into direct advantages for our clients. First, we typically know the history on land parcels that come up for sale. We know if the soil in one region will grow trees faster than another. We know the status of the 100 regional mills and can use this local knowledge to get better prices for our clients. We constantly monitor cutting crews to ensure that the right trees are going to the right mill for the right price.
A few years ago, a storm blew down a significant amount of timber. With all the regional mills flooded with wood and with prices at rock bottom, we faced a dilemma. Storm damaged timber cannot sit for more than 30 days. The prospect of getting and holding cutting crews was also a challenge. Because of our local reputation and long history in the region, we were able to get crews cutting right away. Instead of sending the trees to market for below average prices, we stored them safely at the bottom of ponds. This kept the crews working and saved our clients money. Their fallen timber was harvested, and they were able to wait for market prices to rebound.
NuWire: How has the timber industry changed over the years, especially since the NCREIF started tracking the timber index in 1987?
Schutt: I can speak most specifically about the Southern U.S.
Over the past 30 years, the forestry has developed from very little active management to more intensive forestry practices. Richard Haynes of the U.S. forest service sees this as a continuing trend, considering the following numbers: there are roughly 38 million acres of pine plantation in the South. This represents 9 percent of managed stands in the entire U.S. and one-third of total softwood harvest. In future years, managed stands will represent two-thirds of all timber harvested. The softwood lumber production is expected to grow from 15 to 20 billion board feet from 2010 to 2050. This is the largest growth rate of any U.S. timber-producing region.
Some other changes of note that will help this forecast come to fruition is the mechanization of the entire process. Harvesting used to be done by 10 people producing eight truckloads of wood a day. It is now done with three people producing 10 truck loads a day. The mills today are more automated and efficient. They can process more wood. More timber products have also been introduced into the marketplace. This is beneficial for timber owners because there are more options for monetizing timber throughout the growing cycle.
The NCREIF has come a long way as an index. With all indexes, however, it helps to understand what it is made up of. The index takes in data from large industrial landholders and TIMOs. It also reports on large transactions from which data is made available. The recent International Paper land deal is one such event that will have an impact on the index because of its sheer size. Small transactions and the vast majority of private landholders in the South do not submit data to the index. Those that do report data do so on different time frames (some quarterly, some semi-annually and others annually), and they do so using appraisal methodologies. The underlying data in these cases is only as good or consistent as the appraisals that are made. I would refer you to the folks at NCREIF to explain the intricacies of all this and to learn more about the index. There are many that are more qualified than I am to discuss these particular issues.
NuWire: What sort of perception do you think the public has about the timber industry? Are there any common myths or misconceptions you’d like to clear up?
Schutt: I think that public perception of the industry depends very much on where you are doing your polling. In the U.S. South, the image is a very positive one. It is, after all, the biggest industry in the region and a majority of the population are timber owners. This is the biggest difference between the U.S. South and the Pacific Northwest—private vs. public ownership. The industry has been very proactive about policing itself and has enacted best management practices to ensure that standards are enforced.
I think the majority of the public (outside of timber-producing regions) might conjure up images of old growth forests when they hear the term timber industry. In the U.S. South, plantation farming has been going on for a long time. Trees are grown much like a crop of corn. The harvest cycle is just much longer. But I think public perception of the industry has changed over the years. The industry has become more flexible in realizing the benefits of working with NGOs to safeguard scenic or key landscapes in order to protect a habitat or wildlife corridor. A perfect example of this is the recent International Paper land sale that was completed with several nonprofit partners participating from the beginning to protect lands, as well as to allow working forests. We are in the early stages of this creative partnering when it comes to timber land sales and purchases. Certainly the trend is a positive one and will continue to grow.
NuWire: What sort of impact does the timber industry have on the environment?
Schutt: The number-one detriment to the environment is mismanagement. This includes inexperience or willful disregard for proper road implementation, construction and care, as well as adherence to proper SMZs or riparian zones that protect water quality and wildlife. Again, speaking specifically about the U.S. South, clear cutting very large tracts of timber has been reduced to smaller tracts. Once cutting has taken place, it is common for the land to be replanted almost immediately with new trees.
NuWire: What tips would you recommend for people wanting to invest in timber? What should people be aware of?
Schutt: Timber investing, from our point of view, requires a long-term time frame. You have to have patience and a commitment to the asset class. Do your homework and find out what approach to investing in the asset class is right for you. It is a wonderful asset class to add to a portfolio, as evidenced by the participation of all the largest pension funds and endowments.
NuWire: What do you see in the future for the timber industry, both nationally and globally?
Schutt: See in part the answer to [the prior question about how the timber industry has changed over the years]. In addition to this, global population growth and the emergence of the middle class in less developed countries are positive long term trends for the industry. New markets and industries are being developed in places like Columbia, Brazil and China. Russia has the largest untapped timber resource on the planet. This could find a ready market in China’s, and all of Asia’s, emerging middle class. Teak and eucalyptus plantations are being planted elsewhere just like we plant loblolly pines here in the U.S. These new practices and global markets will increasingly be a factor in our U.S. markets.
NuWire: Is there anything else you think potential investors should know about the timber industry or timber investments?
Schutt: Timber is looked at as a commodity. For the individual investor with direct ownership of timberland assets you don’t have to subject yourself to the commodity price cycle. Factors such as the long-term nature of the investment and the wide harvest window allow a manager to add significant value over time.