Seeing the Forest for Its Hedges

Under the category of shameless self promotion, here is a link to an article in last Sunday's New York Times written by Tim Gray and entitled "Seeing the Forest for Its Hedges".  It discusses different options for investing in timberland (TIMOs, REITs, ETFs and direct investment of smaller tracts). --Brian

A BRIEF TIMO BACKGROUNDER

In discussions with newcomers considering investments in timberland or the publicly traded timber REITs, I frequently find that there is substantial misunderstandings about what a TIMO is and what the TIMO role is in the investment community. This backgrounder is intended to answer those questions. For a much deeper understanding of TIMOs, here is a link to an outstanding and in depth report prepared by Cliff Hickman with the U.S. Forest Service. It was prepared in early 2007 so some of the numbers are out of date but, other than that, it is the best researched report on TIMOs and REITs that I have seen.

What is a TIMO?

A Timberland Investment Management Organization. Note that the first word is timberland, not timber as it is so often written. There is a big difference. Timber refers to trees, timberland is land with trees on it! Many news articles in well-known financial news publications (WSJ, Barron's) have confused the two in recent years, which has led to significant confusion surrounding pricing and values of timberland. The second key point is that TIMOs do not own land; they buy land, manage it and sell it for their clients. They have teams experienced in both forest management and portfolio management. For this advice and service, they charge a fee.

Some history…

During the 1980’s, institutional investors began recognizing the value of adding timberland to their portfolios. By the early to mid 1990’s, there was a call by many analysts in the investment community for the pulp and paper companies to monetize their timberlands to reduce debt. More favorable federal income tax rates and accounting policies applied to the TIMO’s clients than the pulp and paper companies, which made the timberland more valuable for the former compared to the latter. Growth of the TIMOs was rapid as investors sought to acquire timberland and the pulp and paper companies sought to dispose of it. The companies that did not sell their land generally converted to the REIT form of corporate structure to provide higher after-tax returns for their shareholders.

Who are the TIMO’s clients?

They are large institutional investors with a focus on financial objectives, many of which are tax exempt. Specifically:

• Pension funds
• Public retirement systems (CalPERS, the California public employee retirement system, was one of the first and largest timberland investors). European pension funds invest in U.S. timberland also and U.S. funds own timberland in other countries.
• Corporate pension funds
• University endowments (Harvard and Yale were among the first institutional timberland investors)
• High net worth individuals and families
• Hedge funds
• Foundations

Note that the clients are all large investors.  The largest clients generally acquire land in separate accounts while some of the smaller clients participate in accounts with commingled funds. TIMOs are not structured to accommodate most individual investors (there are other good options for individuals though).

How do TIMOs differ from the so-called Timber REITs?

TREITs, or Timber Real Estate Investment Trusts, own the timberland, TIMOs do not. The publicly traded TREITs are Plum Creek (PCL), Potlatch (PCH), Rayonier (RYN) and soon to be Weyerhaeuser (WY). The tax structure for REITs allows the profits to be passed through to the shareholders avoiding the double taxation associated with the C corporations. That tax efficiency is why Weyerhaeuser is converting to a REIT.

How much timberland do the TIMOs manage?

The TIMOs manage approximately 25 million acres worth more than $30 billion. The three REITs (not counting Weyerhaeuser) own about 11 million acres worth about $15 billion. Including Weyerhaeuser, the REITs own about 17 million acres worth about $28 billion.

Who are some of the TIMOs?

Below is a list, in alphabetical order, of some of the largest TIMOs. All of them have web sites that you can google to get additional information about them.

• Conservation Forestry
• Forest Capital Partners
• Forest Investment Associates
• Forest Systems
• Global Forest Partners
• GMO Renewable Resources
• Hancock Timber Resources Group
• Lyme Timber Company
• Molpus Woodlands Group
• ORM/Pope Resources
• Resource Management Services
• RMK Timberland Group
• The Campbell Group
• The Forestland Group
• Timberland Investment Resources
• TimberVest
• Wagner Forest Management

Are there differences between TIMOs?

Yes. They have different investment philosophies that appeal to investors with differing objectives. For example, The Forestland Group invests primarily in natural forests, particularly hardwood. The Hancock Timber Resources Group puts an emphasis on forest technology to improve timber yields and financial returns. Some TIMOs focus on acquiring “conservation land” or land that can have “conservation easements” quickly sold and separated from the fee ownership. Some TIMOs have good information systems with strong financial controls and some do not. Some conduct field audits, some do not. Some have outstanding technical groups in-house, some contract it outside. Some manage the timberland themselves and some contract with consulting foresters. All of these issues should be weighed by investors and the right TIMO selected based on the objectives of the investor.

This post can be downloaded as a pdf here. Visit  the Timberland Strategies web site here. --Brian

Email: jbfiacco@gmail.com