Timber REITs, Timberland and the Transfer of Wealth

11 01 2012

People who cite a rising stock market as evidence of economic health (1) make me nervous and (2) remind me what Timber REIT said to Timberland as they walked out of the gym:  “You’re such a hard asset.”

Roiled and riled markets – and a recent phone call asking about the difference between timber REIT and timberland investments – provide an opportunity to revisit the differences between financial assets and real (hard) assets.  While real assets include consumable goods and productive factories and firms, financial assets – such as bonds or shares of publicly-traded firms – consist of claims on real assets.  Financial assets allow investors to save, diversify risk, borrow and, ultimately invest so that more real assets can be produced and consumed in the future.

“Aren’t shares in timber REITs similar to owning timberlands?”  Sorry, no.  Thanks for playing.  When you own shares in a timber REIT, you don’t own timberland.  You own a piece of a business, over which you have no control unless you are a major shareholder, that happens to generate revenue from selling trees and related activities.    In theory, shares of timber REITs rise over time because they account for the trees and other products being produced and sold.  As the economy improves, so do revenues and,  assuming stable margins, profits to shareholders.  In practice, the super liquidity of timber REIT equities also diminishes their diversification potential; timber REITs basically correlate to the S&P 500 over time.

Timberlands, on the other hand, are real assets.  The challenge of the asset class over the past five years reflects a run-up in prices that outpaced housing markets and GDP growth.  While interest in timberland assets remains extremely strong, we continue to reach for firm ground following a decade-long transfer of wealth from first-time buyers to early entrants exiting the timberland market.

Click here to learn more and register for “Applied Forest Finance” on February 9th in Atlanta, Georgia.

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One response

10 07 2012
Horace

Sane. Sadly, I can point to at least 20 separate posts in places like seekingalpha and motley fool which trumpet the virtue of PCL, WY, etc as a play on Grantham’s timber advice. Tellingly, none of them include charts. Chart any of the timber reits over their lifespans against SPY and I fail to see any diversification benefit. These sites need content to retain readers, it doesn’t need to be worthwhile. It just needs to be something to read.

Thanks for spelling it out.

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