"Timber and land have been really good places to store money if you're patient, and savvy investors have come to understand that."
"Trees grow, and organically they're going to grow 8 percent a year whether the market's up or down,'' Kentucky Teachers' Chief Executive Officer Gary L. Harbin said in an interview from Frankfort, Kentucky. ``If we do have inflation, the raw value of that timber and the land that it's on is just going to increase."
Timberland Embraced by Calpers Hedges Inflation, Housing Slump
By Christopher Donville
Dec. 10 (Bloomberg) -- The worst U.S. housing market since 1991 and plunging lumber prices have done nothing to dim the appeal of timberlands for the $16 billion Kentucky Teachers' Retirement System.
The fund earmarked $200 million for its first purchases of forests, joining investors from Harvard University to the California Public Employees' Retirement System that have poured $40 billion into tree farms since 1990.
Timberland values in the U.S. South climbed 14 percent in the third quarter from a year earlier, according to the National Council of Real Estate Investment Fiduciaries, as pension funds and endowments ignored the housing slump and purchased property as a hedge against inflation. Another $4 billion will be invested in forests within three to five years, New York-based Merrill Lynch & Co. says.
``Trees grow, and organically they're going to grow 8 percent a year whether the market's up or down,'' Kentucky Teachers' Chief Executive Officer Gary L. Harbin said in an interview from Frankfort, Kentucky. ``If we do have inflation, the raw value of that timber and the land that it's on is just going to increase.''
The appeal of U.S. forests has increased even as returns from lands in the South, Northeast and Pacific Northwest fell to 8.3 percent through September from 14 percent in all of 2006 and 19 percent in 2005, based on measures of cash flow and appraised land values published by NCREIF.
Lumber, Pulp
The Standard & Poor's 500 Index gained 7.6 percent in the first nine months of 2007 and Treasuries returned 4.9 percent, according to Merrill index data. The S&P gained 13.6 percent last year and 3 percent in 2005. Merrill data show Treasuries returned 3.1 percent in 2006 and 2.8 percent a year earlier.
About two-thirds of the nation's lumber and wood products are used in homebuilding and remodeling, according to the Washington-based American Forest & Paper Association. Each person in the U.S. annually consumes the equivalent of a 100- foot tall, 18-inch diameter tree.
Profit from forests slowed after the annual rate of new- home construction in the U.S. fell 10.2 percent in September, according to the Commerce Department. Demand for lumber dropped and the price of 1,000 board feet declined 46 percent to $245.60 last week on the Chicago Mercantile Exchange from an almost 11- year high of $458.70 in August 2004, when the pace of building homes was rising to a record.
Some of the drop has been cushioned by gains in wood products used in paper and packaging. Pulp prices have jumped 22 percent in the past year to $764 a metric ton on ICE Futures U.S. in New York. Rising demand from China will lead to more increases, JPMorgan Chase & Co. analysts led by Debbie Bobovnikova said last month in a note to clients.
Afford to Wait
Endowments and pension funds can wait out sagging lumber prices, said Robert Bertram, executive vice president of investments at the Ontario Teachers' Pension Plan, which manages the equivalent of $104.5 billion and has acquired C$3.18 billion ($3.16 billion) of forests, mostly in the U.S. and New Zealand, since 2002.
``When you're in a market like this, the strength of a pension fund owning timber versus a lumber mill owning it is we have no pressure to sell the timber at any moment in time,'' Bertram said a telephone interview from Toronto.
The California Public Employees' Retirement System, at $250 billion the largest state pension fund in the U.S., wants to own more forests to guard against rising consumer prices.
Plum Creek
``We're increasing our investments in timberlands,'' said Clark McKinley, an information officer at Calpers in Sacramento. ``It's leading-edge stuff, and inflation protection is a big part of it.''
Consumer prices increased 3.5 percent in the 12 months through October, the most since August 2006, according to the Labor Department.
Denver-based Janus Capital Group Inc., which manages about $208 billion, spent almost $36 million in the third quarter to boost its stake in Seattle-based Plum Creek Timber Co. to 2.9 percent, according to U.S. government filings. The real estate investment trust is the largest private landowner in the U.S. and advanced 17 percent on the New York Stock Exchange this year, compared with an 11 percent gain in all of 2006.
Institutions have accelerated purchases on concern that opportunities are running out, said Charley Tarver, president of Atlanta-based Forest Investment Associates, a timber investment management organization, or TIMO, that oversees $3 billion of land. U.S. lumber and paper companies have stepped up sales to raise cash and reduce debt.
International Paper Co. sold most of its U.S. acreage last year, some of which it owned for a century, for $6.6 billion to groups mostly led by TIMOs. Competition for remaining tracts is fierce, Tarver said.
Pine Farm
``A decade ago, the big challenge was raising money, not finding a home to place that money,'' Tarver said by telephone from his 1,000-acre pine-tree farm in southwest Georgia. ``Now the opposite is true. The big challenge for TIMOs is finding investment opportunities.''
Global investment in woodlands has risen to about $40 billion from $1 billion in 1990, according to Merrill Lynch, citing a study by London-based Amec Plc. While more than 90 percent is in North America, demand for wood products is growing as economies expand in China and India.
``Timber is not a single product, that's the beauty,'' said Kimberly Tara, who manages the $500 million Phaunos Timber Fund Ltd., which owns forests in Latin America, Asia, Africa and Eastern Europe.
Yale, Harvard
``Investor demand is driven primarily by portfolio risk management,'' said Tara, who also is chief executive officer of London-based FourWinds Capital Management. ``Timber has many bond-related characteristics. On the market side, you have population growth, the use of wood as a substitute material.''
Yale University in New Haven, Connecticut, Harvard in Cambridge, Massachusetts, and other investors own more forests than industrial-paper and forest-products producers, according to Merrill Lynch.
Former owners including Memphis, Tennessee-based International Paper concluded it didn't make sense to own the properties when they could sell them and retain harvesting rights. The company's record sale of 5.6 million acres last year failed to satisfy pent-up demand.
``That deal itself generated a lot of unspent capital'' that's still looking for land, said Bret P. Vicary, a vice president of James W. Sewall Co., an Old Town, Maine-based company that helps funds invest in timber.
Temple-Inland Sale
Temple-Inland Inc. said on Aug. 6 it sold 1.55 million acres in the southern U.S. to Portland, Oregon-based Campbell Group Inc., a TIMO, for $2.38 billion. The same day, Wells Timberland REIT, a privately held trust, announced the purchase of 228,000 acres in the South and leases on more land from MeadWestvaco Corp. of Richmond, Virginia, for $400 million.
Austin, Texas-based Temple-Inland's sale of forests in Texas, Louisiana, Alabama and Georgia works out to about $1,530 an acre, up 28 percent from $1,200 last year, Merrill said. MeadWestvaco's sale to Wells Timberland, excluding leases, was about $1,500 an acre, Merrill said.
Toronto-based Brookfield Asset Management Inc., whose Brookfield Properties Corp. is the largest landlord in lower Manhattan, bought Longview Fibre Co., a trust that owned 588,000 acres in Washington and Oregon, for the equivalent of $3,150 an acre in February, according to Merrill.
Campbell Group bought Menasha Forest Products Corp. and its 135,500 acres in Oregon and Washington in April for $4,000 an acre, according to RBC Capital Markets in Vancouver. The average value of Northwest timberland was $2,408 an acre in the previous four quarters, according to Chicago-based NCREIF.
``The only time that timberland gets risky is when you don't have the ability to stay long-term,'' Forest Investment Associates' Tarver said. ``Timber and land have been really good places to store money if you're patient, and savvy investors have come to understand that.''
To contact the reporter for this story: Christopher Donville in Vancouver at cjdonville@bloomberg.net . |
