aid in determining optimal management treatments and
can maximize growth rates and increase returns. Decisions such as when, or if, to thin a stand of trees or to apply fertilizer can have a material impact on growth rates
and the value of a timberland property. Additionally, we
frequently develop export strategies to diversify our customer base and create market tension for our products.
Ultimately, this should lead to higher pricing and reduced
risk, which positively affect returns.
The ability to store on the stump allows investors the
latitude to realize cash returns when market demand and
pricing dynamics are most favorable. Timber harvests can
be adapted to timber price movements to reduce market exposure and mitigate risk. Because of the biological
growth component, unharvested trees continue to grow
and add value over time. When used effectively, this cash
flow flexibility can lower the standard deviation of timberland returns, mitigate short-term log price fluctuations,
and augment price increases.
In addition to biological growth, three other primary components contribute to total timberland returns: timber
price changes, timberland value changes, and non-timber
income (Exhibit 3).
Timber prices are derived from demand for wood products.
As end-product prices fluctuate, so do the prices for wood
fiber. While short-term price fluctuations impact the cash return generated from a property, short-term price changes have
not historically translated into significant changes in timberland values. This is partly a result of expectations that market
participants will defer harvests in weak markets. In addition,
most participants will use a discounted cash flow model with
a price forecast that converges on a long-term trend price based
on long-term fundamentals, which tends to stabilize value.
Changing expectations surrounding long-term price trends
can impact price forecasts used in timberland valuations, and
might influence the overall investment return.
Land value typically accounts for a smaller portion of the
total timberland investment return. Bare land value fluctu-
ates based upon the supply and demand of the land avail-
able for timber production as well as changes in demand for
alternative uses, such as agriculture, recreation, bioenergy
production, and “higher and better use.” Changes in demand
for alternative uses can provide upside potential to land value
because of increased appreciation and may contribute incre-
mentally to the total return.
Recreational licenses and leases for hunting and fishing,
mineral rights, rights-of-way, mitigations banking, and
carbon offset markets are examples of non-timber income
sources that provide opportunity to add value to timberland investments.
Historically, timberland has outperformed many other asset classes. NCREIF publishes a Timberland Property Index
patterned after its Property Index, which is well known for
measuring commercial real estate returns. NCREIF compiles data from members who submit return information
specific to the properties they manage. Those data become
the basis for the composite return figures for the timberland
asset class in the US. As evidenced in Exhibit 4, timberland
returns, represented by the NCREIF Timberland Index,
have outperformed stocks and long-term corporate bonds
The NCREIF Timberland Index generated a 7.06% total
return over the past five years (through December 31, 2016).
Depending on the region in which one invests in the US, returns can differ materially. For example, the NCREIF Timberland Index for the US South returned a total of 6.07%; in
comparison, the US Northwest returned 10.61% during the
same five-year period (ending December 31, 2016).
Timberland returns vary between geographies based on
growth cycles (average time from planting to harvest age);
product mix (i.e., sawtimber or pulp); product pricing; in-country (domestic) demand; export opportunities and pricing; and other regional, national, and international economic
factors, in addition to the skill and expertise of the investment advisor.
As discount rates in the US have compressed over time because of broad market yield compression and overall market
efficiencies, many investors have looked outside the US to generate excess returns, further diversify their timberland portfolios, and take advantage of global supply-and-demand trends.
Timberland investments in Australia and New Zealand, two core, well-established timber markets, can typically expect to realize moderately higher investment returns
compared to those in the US, depending on individual tax
outcomes and assuming one is investing in established plantations. Countries in Latin America, such as Chile, Brazil, and