For clients seeking additional assets for their portfolios, it’s time to consider timberland real estate investment trusts (REITs), experts say.
Kent Croft (below, right) and Russell Croft, co-portfolio managers of the Croft Value Fund (CIVFX) in Baltimore, believe there is a strong case for investing in selected timberland REITs.
The four reasons the portfolio managers cite include:
1.Their investment characteristics
As trees grow, both per-unit price and volume increase at the same time.
The harvestable tonnage per tree increases, and the value of each ton increases as larger logs have more valuable uses. Together, these factors, even using depressed current prices, lead to nearly a 10% average annual growth rate in the value of a typical southern yellow pine tree from years 13 to 24.
Additionally, timberlands have very low capital requirements; all that’s required is planting and periodic harvesting.
Low capital requirements lead to strong cash flow and attractive dividend yields from timberland REITs.
2. Use as an inflation hedge
Timber tends to increase in price with inflation.
Timberland operators may also exploit the mineral rights (the ownership of underground minerals) they have retained on their land; these rights also tend to appreciate in an inflationary environment.
3. Strong underlying demand
The Crofts believe that the demand outlook for timber is positive for the long term. They forecast that U.S. housing will continue to drive demand for the foreseeable future as each 200,000 in incremental housing starts increases North American lumber demand by 5%.
U.S. housing starts have improved significantly to about a 900,000 annual pace so far in 2013 from the 2009 trough below 500,000.
“Compared to the 2006 peak of approximately 2.2 million starts and an estimated normalized level of 1.6 million, we feel confident that housing activity has room to improve from current levels,” said Russell Croft (left) in a recent report.