Financial Advisor, June 2003 downloaded from
on November 6, 2003
The Growing Allure Of Timber
Such investments are available primarily only to the wealthy.
By Caren Chesler
After being whipsawed by the stock market, investors want more tangible assets—land they
can stomp their feet on, buildings they can touch, trees they can see grow. It’s no wonder
timber is becoming increasingly popular among wealthy investors. When trees rise, they have
value, and when trees fall, they have value.
Traditionally an investment for large institutional investors like public pension funds,
foundations and endowments, timber is on its way to becoming one of the new asset classes in
which affluent individuals put their money. For starters, investors can expect returns of 10% to
12%. That’s not too shabby considering the S&P 500 Stock Index lost 22.1% last year. Even
dividend-paying stocks paid a total return of only 5.1%, on average, according to Weiss
Ratings Inc., a Palm Beach, Fla.-based company that analyzes stocks and mutual funds.
It’s not the lofty 16% returns timber investors received in the 1990s, according to the National
Council of Real Estate Investment Fiduciaries. But that was an aberration. Timber prices were
pushed higher after the U.S. Fish and Wildlife Service put the northern spotted owl on the
endangered species list. The move led some to speculate there would be a shortage of trees,
pushing timber prices upward. Both timber and pulp prices have since come down.
Still, investors receive a relatively safe, stable income that provides their portfolio with
diversification, and most important, a yield that really is not correlated with the stock market.
And timber has what those in the industry call biological growth: You go to sleep and trees
grow. You wake up and trees grow.
“We look at it as a tree factory, where the land is the factory that grows the trees, and the trees
are the inventory,” says Matthew Donegan, managing director and chief investment officer at
Forest Capital Partners in Boston.
Individuals also receive tax benefits, something institutional investors couldn’t take advantage
of since most of them are tax-exempt entities. For starters, returns are treated as capital gains
rather than income and are thus taxed at 20%. Timberland is also depreciated as the trees are
cut down, a process known as depletion. Investors can use the land’s depletion to offset their
taxes, much the same as they use depreciation of their home. But it comes at a cost. When the
property is sold, the government taxes you on the difference between what you paid for the
property—or your cost basis—and the price at which you sold it. And as is the case with
depreciating your home, depletion has the effect of lowering your cost basis and thus increasing
the capital gain on which you will be taxed. Still, industry sources say the benefits of depletion
outweigh the costs.
Timber investors can also receive ancillary income, such as fees for leasing the land to hunting
clubs, or revenue from any oil, gas or minerals found there. TimberVest LLC of Atlanta owns
property in the Ozarks, for instance, where it mines saline.
“We look at those as zero-cost benefits,” says Joel Shapiro, TimberVest’s CEO. “We look at
timber investing as similar to real estate, but you don’t have tenants who can walk out in the
middle of the night. And buildings don’t grow by themselves.”
A possible added benefit: A lot of timber properties are on the market now at relatively cheap
prices because many paper companies are struggling with too much debt and are unloading
A clear disadvantage with timber is that investors own a relatively illiquid instrument for about
10 years, with little hope of selling it if they wanted to. There are regulatory risks, such as the
spotted owl crisis, which may have raised timber prices but also made it more difficult to cut
down trees. There are reforestation laws in many states and harvest restrictions near waterways.
Timberland owners are subject to the Clean Water Act, the Endangered Species Act and other
potential wildlife and environmental issues. There are also the risks of fires or disease, though
timber experts say these risks are nominal in forests that are managed.
But far and away the greatest risk in timber investments is fluctuating timber prices, which are
directly affected by the economy. The housing market is currently strong, bolstering lumber
prices, but the pulp market remains soft. Timber prices are directly related to paper and lumber
prices, which are commodities, and those are cyclical businesses.
Still, investors who have been whipped around for three years on the stock market roller coaster
appear to be willing to take that risk. Shapiro says investors used to tap his company’s Web site
about once a week. Now, there are two to three hits a day.
Traditionally an institutional money management firm, TimberVest will begin marketing its
first fund to wealthy investors in June, a $200 million limited partnership. The minimum
investment is $500,000, the term is 10 years, and the funds will be co-mingled with institutional
money. Investors will be charged a 95-basis-point management fee and will have to hand over
10% of the profits to the fund’s managers if it returns 9% to 10%. If the fund returns more than
10%, the performance fee rises to 20%.
“People want an absolute way to put money away and not lose it,“ Shapiro says. “Even if you
have no price appreciation on timber and no price appreciation on the land, the trees are still
going to grow.”
TimberVest is not alone. About a dozen money managers now offer timber investments to
wealthy individuals. Like TimberVest, some offer limited partnership interests, in some cases
for as little as $250,000 down. Others offer separate accounts or even direct investments in
tracts of timberland, but those products are usually reserved for the ultra-wealthy.
The only product available for retail investors, or those with less than $250,000 to invest, are
shares in companies like Plum Creek Timber Co., a real estate investment trust that trades on
the New York Stock Exchange. The company owns eight million acres of timberland in the
Charley Tarver, president of Forest Investment Associates in Atlanta, says Timberland
Investment Manager Organizations, or TIMOs, as he called them, have been trying for years to
come up with a timber product for retail investors, but to date, it has evaded them. “I think it’s
something everyone in the business thinks about from time to time, but no one’s ever put
together the right kind of vehicle,” Tarver says. “It’s not a very liquid investment, so it’s really
better suited to larger institutional investors. We have a few high-net-worth individuals, but
they behave like institutional folks.”
The problem for timber money managers is finding those high-net-worth investors. Donegan of
Forest Capital Partners was a veteran of the institutional market, but three years ago, he and a
partner decided to launch a timber investment firm that would cater to affluent individuals.
Donegan went out and joined the Institute for Private Investors, an organization that provides
educational and networking resources for wealthy investors and family offices. It also holds
cocktail parties and offers managers like Donegan entree to the reclusive world of the ultra-
He’s made some inroads. Forest Capital currently has $400 million under management in three
co-mingled funds. That is, investors pony up a minimum of $10 million, and their assets are
then pooled with those of other wealthy individuals and invested in a diverse portfolio of
“Individual tracts offer the greatest degree of control but the lowest degree of diversification,
and they typically don’t have professional management,” Donegan says. “The private funds
offer professional management and diversification, and the benefits of economies of scale
because you’re pooling with other investors.”
Donegan says timber is receiving a lot of buzz these days because investors desperately want
capital preservation and diversification in their investment portfolios. At the same time, there is
a restructuring in the forest product industry. Put those together and you get high transaction
volumes, which is what we’re seeing today, he says. In 2002, some 2.4 million acres, or more
than $2 billion, in U.S. timberland were sold —and that’s only the large transactions. Prior to
last year, less than $500 million in timberland changed hands each year, Donegan says.
“Most are expecting 2003 to surpass 2002,” he says. As of March, there were already two
million acres sold or poised to close.
Hancock Timber Resource Group, a wholly-owned subsidiary of John Hancock Financial
Services and the largest player in the timber market, says it began offering timber investments
to individuals and family offices nearly four years ago. Individuals still account for less than
10% of the firm’s $2.7 billion in assets, but officials there say they have seen a noticeable
increase in interest over the last few years.
“It’s a real asset. People find comfort in that these days,” says Clark Binkley, managing
director and chief investment officer of Hancock Timber.
Binkley says investors interested in the asset class can tailor their investments according to
their needs. They can buy land and plant trees, though it would take 20 years before they
received any cash from it. Or they can buy a forest with mature timber and generate a tax-free
income stream almost immediately, for about six or eight years, but they deplete the value of
the property as they cut the trees down.
“When it comes to individuals, we can tailor the product to take advantage of the tax benefits,”
Binkley says. “But the minimums for our funds are $1 million to $5 million, and we only
market to sophisticated investors.”
World-Class Investor Loves Timber
Timber is actually Jeremy Grantham’s favorite asset class. The bearish chief investment officer
of Boston money management firm Grantham, Mayo, Van Otterloo (GMO) likes the inverse
relationship it has with stock prices, particularly during market downturns. Grantham likes it so
much that a few years ago his firm created a separate affiliate, Renewable Resources LLC, just
to invest in timber. The group has only $300 million under management—in comparison, GMO
has about $25 billion—but its growth has been rapid, according to Eva Gregor, one of the
group’s managing partners.
“We’ve seen a surge in the popularity of timber,” Gregor said. “It’s like an on/off switch.
Before, it was hard to get people to call us back. When the liquid markets began eroding 20% a
year, people started calling us.”
Most of Renewable Resources’ clients are still institutions, but with a $500,000 minimum
investment level, it welcomes individuals. Gregor says the minimum can be even lower for
clients who come through financial advisors, who are likely to bring the group additional
clients down the road.
The group offers $30 million to $50 million limited partnership funds, which have a duration of
ten years. The funds’ targeted real rate of return is 8%, net of fees. GMO’s newest fund, GMO
Forestry Fund 6, just closed at the end of January, and the firm doesn’t expect to offer another
one until the money is invested. But for Renewable Resources, that can mean less than a year.
Its last fund was invested in six months.
Gregor says she doesn’t encourage clients to buy the product for the yield. The group tends to
buy young trees that won’t be ready to harvest until about year seven. The investments kick off
a little bit of cash after year three, but it’s usually just enough to cover property management
expenses, she says.
While the growing popularity of the sector has made it a little easier to sell their products, it has
also made it a little harder to meet their targets because there is more competition for buying
timber properties, Gregor says.
“There are some large private investors who have made investments directly in forest land. And
there’s more institutional money looking for investments now,” she said.