Bogleheads

[ExStockAnalyst]

I've posted two "Intro to Timber Investments" articles on my personal homepage here. I appreciate any feedback or corrections on this content, which I may repurpose later for Seeking Alpha.

I know many Bogleheads are at least curious about this topic, judging by the 31 posts from the semi-related thread "Non-tradable timber REIT: debt/equity ratio of 39.1?" I started earlier.

I write that, historically, timber has generally delivered higher risk-adjusted returns than stocks, bonds, and commodities over the long run. However, I argue timber ETFs do not provide genuine access to this asset class, and that timber REITs don't provide as much exposure as investors think. My articles address my correlation calculations, brief discussions with industry experts, and a link to a Bogleheads thread on the dangers of non-traded REITs.

- George

[stratton]

Very nice!

The only comment I can think of on investment evaluation might be to discuss price per acre variations between softwood and hardwood that might explain valuations in some of the REITs.

You appear to have missed Wyerheuser (WY) and their possible (big maybe here?) conversion to a REIT in the future. The TREE act was passed so they have 15% tax rate if they convert, but it appears they don't want to do it until 2010 at the earliest.

Yahoo page on WY

WY analysis from Seeking Alpha

I see the article says 5.6 million WY timber acres. I think thats US. Supposedly WY has 14 million overseas.

The problem I can see you having with this report is creeping "extra" information where you start adding things like different regional timber markets and their volatility etc. The next thing you know you'd be up to a 50+ page report and sinking your free time into it for a year.

Paul

[ExStockAnalyst]

[tadamsmar]

[Tramper Al]

Hi George,

Great stuff. I'm the fellow from the other thread who has been using my own little index fund of US designated "timber REITs". So that used to be four issues, now it is the 3 that you mention.

I am wondering if such heavy reliance on a single (2007) year's percentage of total sales derived from timber might be rather insensitive. I've been uder the impression that harvest/sales of timber is not necessarily a constant activity, and that these REITs may time such things based on demand, prices, etc. I just wonder if several years worth of data (I know not available) might tell a different story or if % timber sales is really the be all and end all of defining the purity and desirability of each of these vehicles? Could it not be that in 2008 PCL is 25% and RYN is 75% (timber)?

Along those same lines, I know that there are rules that must be followed for a company to be classified as a timber REIT for tax purposes. Am I naive to imagine that if a company really derived 75% of its earnings from non-timber activities, then they could never continue to be qualified as a timber REIT?

In the case of Plum Creek, as an avid Maine outdoors person, I enjoy use of their land in many ways, including through conservation easements and the like. I'm not sure that for investment purposes, I see a timberland real estate sale as being all that different a source of income than is holding and harvesting. At least in terms of which asset class I would put it in. If my timber REIT can buy and later sell a little land with trees on it, and pass the profits on to me at the LTCG rate, I'm OK with that.

I am interested in what you have to say about POPE, though like many investors I never want to have or need a tax attorney on staff, particularly for an IRA investment! Is it a problem of that UTBI (or something like that) source income exceeding $1000 (or something like that)? If one is careful to limit the size of the investment, can the tax issues be largely avoided (holding in IRA I mean)?

The UK funds you mention look interesting, but I avoid the 2 + 20 expense vehicles, always.

[ExStockAnalyst]

[Tramper Al]

[ExStockAnalyst]

Al and Paul, thanks again for your enlightening feedback!

The first of my 3 timber articles for Seeking Alpha has been published here. In the next week or two, they'll post my forthcoming articles on timber REITs and on Potlatch's proposed spin-off. To keep an eye out for them, you can check the Yahoo newsfeed (for tickers like PCH) or revisit my SA bio page.

I've made some minor edits to the original text on my site. One thing I've done is de-emphasize the trailing-decade correlation statistics of the REITs. While I want investors to realize that those #'s have been quite low, I also want them to realize that #'s are likely to increase somewhat as the REITs have -- and will continue to -- dump manufacturing assets to become more timber-focused. In any case, it's a useful data point but I think the current revenue-segment breakdowns are more enlightening.

Let me know if you have any questions.
- George

[Tramper Al]

Good stuff.

I continue to see news about WY, basically to the effect that its vocal investors want REIT conversion to "unlock value", while the execs are working hard to resist this. I get the idea that they are a huge holder of timberland, but also too much else. By my timber REIT index criterion, I will just have to wait for WY, I think.

In terms of the correlation of the timber REITs and the timber index (which I'm not really familiar with), I am starting to see parallels with other asset classes like real estate, commodities, and gold.

In each case, there are publicly-traded corporations available as a way to invest. Conventional REITs, sector index funds in energy production, materials, precious metals mining, etc. I think in each case the publicly-traded nature tends to increase correlations with the stock market as a whole. And of course these are actual businesses, subject to economic cycles, etc.

Then you have the more pure versions like TIAA RE, commodity CCFs, gold/metal CCFs, and bullion ETFs. Of course these vehicles have their own pros and cons, but I think that in the case of timber, we don't really have anything available yet that is even as good as these for other "hard assets".

[Sammy_M]

George,

Enjoyed your articles. One of the reasons I love Bogleheads is the diversity of information.

I was particular interested in the correlation info in your first article. Like tadamsmar, I inherited a small timber track and have not given much consideration as to how it fits within my overall investment portfolio. Considering that the value represents almost 30% of my portfolio, probably not wise. Given that my 'holding' is not diversified, I am concerned with the physical risks, but not much I can do about it other than routine maintenance (prof. inspection, thinning and fire breaks). I imagine lots of people in rural areas put their entire retirement savings in timber only to lose it in a wildfire or infestation.

Pls keep us posted as you publish new articles.

tadamsmar, I'd also be interested in any more 'Tips' or useful resources relating to directly owning timber. The local forestry commission is my best resource now.

Thx.

[ExStockAnalyst]

Thanks again for all the feedback, guys. By the way, you may be interested in reading my new thread entitled "Did HardAssetsInvestor.com plagiarize my timber article?" and offering me any feedback there. Over there, I mention that Tramper Al and stratton, among others, have previously offered excellent insight. Thanks.

[Tramper Al]

[grabiner]

[ExStockAnalyst]

Hey guys, here are some key excerpts from a new Dow Jones story (temporary link), "More Investors Look To The Woods For Growth":
===
Even as prices for commercial and residential real estate have continued to tumble, timberland prices have remained strong ... A relatively young stand of timber, depending on species, can pack on 6% [growth] a year ...

[cited expert]: "I think that a lot of the investors are thinking their biological growth is going to make sure they at least break even. Their gamble is the price appreciation on top of that. It's not like a house. A house doesn't grow" ...

To be sure, There are those who worry the price of timberland - which has risen 30% to 40% by some estimates over the past decade - has hit a peak ...

Plum Creek's stock has followed suit; it's up 6.3% year to date, compared with a 19% drop in the S&P 500.
===
- George

[Tramper Al]