Precious Timber

Timber is a desirable asset class for several reasons. First, timberland has historically generated excellent returns. Second, timberland historically has a low correlation with other major asset classes, therefore, providing portfolio diversification. Third, timberland returns have been positively correlated to the rate of inflation, which creates a hedge for the portfolio. Finally, including timberland in a diversified portfolio can increase total return at commensurate levels of risk.

Timber beats stocks and real estate.

Managed timber (as professional investors call it) has actually beaten the stock market – with less risk – over the long run. From 1973-2002, managed timber returned roughly 15% annually as an investment, while stocks returned about 11%. Timber has also beaten real estate even though real estate packed quite a punch between 2001 and 2006, appreciating 12.4% annually, according to the S&P/Case-Shiller U.S. Home Price index. A study by Jack Clark Francis, a finance and economics professor at Baruch College in New York City, and Yale’s Roger G. Ibbotson compared the annual returns of real estate from 1978 to 2004. The results? Housing delivered a solid but unimpressive annualized return of 8.6%. Commercial property did better at 9.5%. Other studies argue that real estate’s returns are much worse. Yale finance and economics professor Robert Shiller, author of Irrational Exuberance, who looked back to 1890, contends that only twice has real estate produced truly outstanding returns: after World War II, when returning troops were starting their families, and from 1998 to 2005, a period he thinks was a bubble. Housing’s rate of return, he argues, has to trend back to the mean of about 3% a year – barely above the inflation rate. If that’s starting to happen now, he says, we could be facing many years of losses. Looking forward over the next decade, it seems highly likely that real estate investment returns could have a tough time comparing with those of the stock market, but are sure to fall well below those of timber investments.

Timber is uncorrelated to stocks.

Trees don’t know about the war against terrorism, or the bear market in the Nasdaq. While stocks couldn’t keep up with inflation in the 1970s, timber investments never had a losing year! Trees just keep growing year after year. So investing in timberland is an excellent way to balance your portfolio as its value rises even when stocks are falling.

The price of timber has consistently beaten inflation.

Think of your timber investment as a good inflation hedge – the numbers show that to be true. According to legendary investor Jeremy Grantham, over the last century, timber prices have risen at 3.3% above the rate of inflation. Add 5% a year in income, and you’ve got a timber investment asset that has returned double digits.

Institutional investors are desirable owners of timberland for a number of reasons. Primarily, institutional investors are capable of funding larger transactions and are typically longer-term investors. These attributes uniquely suit timberland ownership. Also, institutional investors are more flexible with harvest levels based on log prices. Notably, the institutional investor is not motivated by mill requirements.

In the U.S. the Forest Products industry own approximately 70 million acres, federal and state governments own approximately 140 million acres and private individuals own the remaining 290 million acres. Over the last 15 years, a fundamental change has occurred in the ownership of a significant part of these commercial timberlands. Institutional investors, such as public and private pension funds, endowments, foundations and high net-worth individuals, are purchasing large tracts of timberlands from these forest products companies, and selling the logs harvested from these lands on the open market.

The risks associated with timberland investments can be classified into two major categories: physical risks and economic risks. Physical risks include natural disasters, pest infestation, disease, animal damage, and theft. Economic risks include price risk, supply risk, regulatory risk, demand risk, and liquidity risk. With proactive on-site timberland management, most risk factors can be minimized dramatically. 

First of all, most of the world’s timber is privately owned by individuals however, the average investor doesn’t own a portfolio of various sized forests, they own a portfolio of diversified stocks, bonds, real estate, etc. Why is this? This is because the financial industry wants it this way. The more they can convince you to buy & sell something, the more commission they earn. People who buy forests and timber have no interest in buying and selling, they understand the value of buying and harvesting, and then harvesting again. The investment world; whether television, internet, newsletters, etc., have no interest in discussing a vehicle as mundane as timber or forestry. It just isn’t the kind of subject that is going to have their viewers or customers tuning in every night or renewing their subscriptions each year. Timber is a pretty boring – albeit profitable – investment, but we live in a time where most people want results now and the idea of having to wait ten years to realize a profit is unimaginable. In the tree-growing business, time periods of ten years are common. Moreover, people with traditional schooling in financial management will usually reject long-term timber investments in favor of short-term vehicles. They clearly understand the average investor today is impatient and is focused more on investment performance than they are investment stability. Today, we are fortunate to have a wide range of investment alternatives, and while most are easy to manage, few provide a respectable return. In short, the competition for investment capital is intense, and the financial industry has managed to do a wonderful job of keeping people moving their money from one asset class to another in search of instant profit gratification.

All of the trees we plant on our farms are registered with the Nicaraguan Forestry Institute (INAFOR), and as such each tree is given a GPS coordinate reading and is logged into a registry. When you purchase timberland from us, you will receive title to the property just as you would any other real estate asset. Plus, we will produce a surveyed plot map of the property together with the GPS coordinates of your trees. We also issue you a plantation registration certificate that includes the number of trees you own in addition to marking your property with a personalized identification marker.

Our foresters have more than 35 years combined experience in managing tropical hardwoods, and they have experienced loss of timber values due to physical risks like fire, pest infestation, disease, animal damage and theft averaging less than one percent of the value of timberland under their management. The preponderance of risk is found in the first six months after planting a new sapling, and our replacement guarantee during a tree’s first year covers this risk for our clients.

We adhere to a vertical integration philosophy which effectively means virtually all management of our company and farms are provided by employees of the Company (i.e., performed in-house) rather than through third-party providers or consultants. For optimal performance, Maderas Futuro employs committed on-site forestry professionals rather than relying on third parties or consultants to execute our strategies. Our philosophy and strategy is focused on client service and adding value. We believe these key goals are best achieved when performed by our own employees who share in the goals we set. This structure is unique in the region and we work hard to protect and nurture it.

The addition of timberland, by itself (even in a single investment), provides positive diversification benefits to an investor’s portfolio. As an investor builds their timberland portfolio (utilizing an opportunistic approach), over time, a diverse portfolio of timberlands of varying age classes, species, locations, regions, and country locations can be achieved. Timberland is generally a niche investment and therefore the investor should focus on the region that offers the most favorable value and opportunity and not focus on diversification of the timberland portfolio simply to “diversify”.

With a self-directed IRA you can invest your retirement funds when, where, and how you want. You can create your financial future with the freedom to make choices with your retirement plans. Self-directed IRA’s give you the unique ability to choose from a variety of investments options from real estate, private placements, timber, and more. And by diversifying your investments, you may protect and enhance your retirement. We can recommend to you several of the most trusted administrators available.

When the time comes to harvest your trees you will have the option to have us sell your logs or sawn lumber for you or you can arrange a sale yourself. If you choose to have us market your logs/sawn lumber we will harvest your trees as directed by you and approved by our foresters in the same professional manner we harvest, process, and sell our own trees. You will receive a pre-harvest report that will include our forester’s recommendations. The net proceeds from the sale will be deposited into the appropriate custodial account within 14-days of us receiving payment from the buyer. Your funds will be accessible by you at this time.

You are free to sell your trees and timberland at any time you wish. Maderas Futuro, S.A. remains focused on producing sawn lumber and the projected returns from this provide an above-average rate of return. You however, personally determine when you want to exit. Timberland owners have several options to choose from should they wish to sell their property prior to harvesting lumber. 1. Maderas Futuro often times has clients interested in acquiring additional mature property; be sure to contact us. 2. We have created an online buy/sell marketplace on our website where you can advertise your timberland – the closer they are to harvest the easier it is to find a buyer. 3. You can sell on the open timberland buy/sell marketplace through places like www.landwatch.com and have our forester prepare a report to see what the current property values may be.

Yes, timberland as an investment can be structured to your specific needs. Precious Timber has the ability to customize a timberland plan to fit an individual’s specific goals and objectives.