The search for investments that consistently produce above-market returns, aren’t correlated to the overall markets, and carry a relatively low minimum may have become a bit easier by the introduction this month of Wells Timberland REIT. This new fund is managed by Jess Jarratt, who has a BS in forestry, an MBA, and is a CMA. He’s held forester positions, did corporate lending for Rabobank, and built several businesses at SunTrust Robinson Humphrey. He spoke with Editor Jamie Green in April.
What’s the story of timberland as an investment?
Many fortunes have been made from it, especially around the turn of the [last] century. But it’s also an asset that’s been ignored by the investing community, and was more of a strategic resource for large institutions for years. It wasn’t until 20 years ago when John Hancock and Calpers got involved and helped legitimize timber as a return vehicle. Since that time, well over $15 billion–and by some estimates $30 billion–has been invested by large institutions in timberland, and it has performed very well. An index called NCREIF shows that timberland has done in the neighborhood of 15% [in annual returns] since 1987.
But it’s never really been available as an investment for average men and women. Leo [Wells, Wells Real Estate Funds' founder and CEO] has always been intrigued by timberland and how to put together a timberland investment opportunity for individuals. That’s what we’ve done with the Wells REIT.
Timberland also doesn’t correlate with other asset classes, correct?
Let’s tick off the points that are positive about timberland. Timber grows–if you decide not to cut timber, you’re not forgoing income, because you’re getting the value appreciation for that year when you didn’t cut. It also changes products as it grows, from one product class to another, and each product class [more than] doubles in terms of value. The initial product which timber becomes at age 15–I’m talking about Southern forests–is pulpwood, which mills make paper from. At around age 20-22, the product turns to pine chip’n'saw–a very small log, from which they make dimensional lumber 2x4s. Pulpwood sells today for about $7 a ton in the Alabama/Georgia area; pine chip’n'saw sells for $22 a ton. The last phase is pine saw timber at around age 25 or 26. It sells today in the South for about $45 a ton.
So the postitives about timberland are that it grows and you can’t overbuild it. From an investing perspective, timberland returns are, over the long haul, correlated with inflation. It tracks inflation very well, the value of those products tracks inflation, and the value and sales of those products–their returns–are countercyclical to stocks and bonds. So it’s a diversification play to own timberland, and an inflationary hedge, but you need to invest with a total return mindset. If you’re a trader, don’t invest in timberland.
For the REIT, we’re buying all age classes. So day one we’re harvesting some and planting some, and continually adding as we cut. We’ll get cash flow out of the box. Nevertheless, to get the full value from timberland, you need a view that’s at least seven to 10 years.
Why put it in a REIT?
We’re going to pay some distributions, some dividends, but we need to be able to manage to those dividends around what the market is doing. I get questions all the time, “Housing starts are cratering, the B and C loan markets are defaulting–Isn’t that really bad for timberland?” Yes, it impacts timber prices, but we don’t have to sell. We can sit on this stuff for a couple of years and wait if we need to, because the growth of timberland offsets the time value of waiting. We can pay a little less dividend one year, and pay more the next when timber prices are better.
Is timberland a risk management tool?
Timberland is a very low risk asset class. The biggest risk is paying too much for it.
This will act like any other REIT?
We’ll be purchasing a diversified portfolio of timberland by species, age class, and geography. That diversity will blend together in a total return way so we’re not dependent on the logging market in the Pacific Northwest, or what a paper mill in Alabama is doing [at any given time]. Not unlike a commercial property portfolio.
How do advisors gain access to this?
We’ll do it the same way as the other Wells REITs, primarily through independent broker/dealers. The registration of this fund is effective now; it will become a very visible product by the end of May. We expect there might be interest from a lot of different fronts. We could have some smaller institutional investors, but our focus is the Wells’s independent B/Ds.
It sounds like this is democratizing timberland investing.
You could say that. There’s a minimum investment of $5,000, and the minimums mandated by the SEC [on an investor's net worth and income] for this type of investment. But the threshold is fairly low for most people who are interested and have other investments.