FEATURE - Investor groups replace timber barons as forest owners
Date: 22-May-02
Country: USA
Author: Lauren Weber
But beneath his tranquil vision, Clutter, an academic who specializes in forest finance, sees a large-scale transformation taking place.
Ownership of the vast U.S. timberlands is moving from traditional forest products companies to investment groups that hope to make money on their holdings - and that could have big consequences, not just for the lumber industry and its investors, but for local economies and ecosystems around the country.
"Fifteen million acres has changed hands in the last four years. That's a big structural change for our industry," said Clutter, a professor at the University of Georgia's Warnell School of Forest Resources and author of an upcoming study about changing trends in forest ownership.
The real estate implications alone are staggering. Land holdings three times the size of the state of Massachusetts have changed hands.
Most of it is being snapped up by timber investment management organizations, or TIMOs, which invest money for institutional investors and wealthy individuals looking to diversify their portfolios. That marks a major shift from the forest products companies who own land to supply their mills.
Conservationists are watching the sales closely, trying to monitor the long-term impact of the trend. The industry's big land sale has created opportunities for preservationists to buy big tracts - often in partnership with TIMOs. But environmentalists are concerned about parcels being sold for development.
So far, that has not happened much, and some of the investors have supported environmental aims by putting conservation restrictions on the land. In the meantime, they are also reaping financial benefits.
From its inception in 1985 through 2001, Hancock Natural Resource Group, the largest TIMO, has generated an average annual return of 14.6 percent. At a time when the stock market is falling and money market yields are in low single digits, it's been one of the top-peforming investments.
Over the past five years, the timber investments have been a steady earner, said Hancock chief investment officer Clark Binkley: "About the same as the S&P 500, but with much lower volatility."
Unlike forest products companies, which have produced poor returns in the last few years, TIMOs don't own mills and manufacturing facilities that eat through capital whether the market is good or bad.
"We don't have that as a liability," said Jim McCauley, spokesman for the Campbell Group, a Portland, Oregon-based TIMO. "And we're not obligated to cut a certain amount of harvest to supply a production facility," he added.
That gives TIMOs the flexibility to harvest when prices are high. Then they sell the logs back to forest products companies, who process them for items like paper and lumber. For owners of the TIMOs, often big financial institutions like universities that have a non-profit status, it's a steady and reliable source of income.
The shifting ownership trend is likely to continue, though perhaps not at the blistering pace of the last few years. Another 12 million to 15 million acres will transfer out of industry ownership in the next decade, according to the Pinchot Institute for Conservation, a Washington thinktank. That's a substantial chunk of the 68 million acres of timberland currently owned by forest products companies, according to the U.S. Forest Service.
TIMOs say timber is a bargain for investors now. "Forest products companies recognize that it is a buyer's market," said James Webb, senior vice president of client services at Wachovia Timberland Investment Management. As a result, he said, timber companies are selling their land cheap.
"You can see discounts ranging anywhere from 15 to 20 percent off what the market would recognize as a true market value," he said.
AN INDUSTRY IN TRANSITION
Forest products companies say the sales make sense because timber weighs down the balance sheet and belongs to an outdated industry model. Wall Street analysts