As other investments fade, forests remain attractive
WASHINGTON — While investment products like credit default swaps became homes for enormous sums of cash over the past decade before crumbling in recent months, a simpler investment has stood strong: forests.
Over the past decade, investment firms called Real Estate Investment Management Trusts and Timberland Investment Management Organizations have bought up huge tracts of forests that were once owned by logging companies. In Oregon, Fidelity National Timber Resources bought more than 250,000 acres in 2006 following the bankruptcy of Crown Pacific Partners.
That land includes the 33,000 acres northwest of Bend known as the Skyline Forest, or Bull Springs Tree Farm, along with 140,000 acres surrounding Gilchrist.
While the stock market as a whole has been hammered in recent months, firms that own forests have lost much less — and are continuing to buy up timberland, even during the downturn.
Forestry consultant Tom Tuchman, a former top Clinton administration official on forest issues, said forest prices have been steady, despite low real estate and timber prices. He said investment firms have purchased at least four major forest tracts in recent months.
“It appears to be as competitive as ever,” Tuchman said.
Forest investments have declined in value in recent months, but less than the stock market as a whole, said Bob Izlar, the director of the Center for Forest Business at the University of Georgia.
Izlar said several factors make forests attractive investments, especially in economic downturns. The most basic is that forests are a real, tangible thing, which can give comfort to nervous investors.
“If you knew that you had money in timberland, you can go look at it, go walk on it,” Izlar said. “It’s not this hypothetical value of Citibank stock that might be worth this much three weeks ago and now it’s worth this much (less).”
As investments, forests are a combination of timber and real estate. Even though both timber and housing prices are low now, companies don’t lose money in the long term by waiting until prices rise to cut trees, Tuchman said.
Patience can pay off
While many agricultural products, like food products, lose value if they’re not immediately sold, trees get bigger and more valuable the longer they sit.
“One of the attractive aspects of timber is in economic downturns you’re able to store that capital, if you will, on the stump, and the asset appreciates,” Tuchman said. “If you don’t cut in an economic downturn, you know when prices go back up you’ll have more value per log because your forest is growing.”
That works in the short term, but at some point, firms do need to sell trees or land to make money, Izlar said.
“You can’t wait out 10 years, but you can wait out a two- to three-year cyclical dip,” Izlar said.
The biggest private forest holder, Plum Creek Timber Co., which owns land in more than a dozen states, has maintained steady profits, but saw its net income decrease from 93 cents per share through the first nine months of 2007 to 81 cents per share through the first nine months of this year, according to filings with the Securities and Exchange Commission.
Still, investors have continued to buy up forestland, according to a study by forestry industry trade publication, Timber-Mart South.
Timberland in the hands of industrial companies, such as Weyerhaeuser, fell by about 40 percent from 2000 to mid-2008. Meanwhile, the top 10 timberland investment firms have been buying up forests at a ferocious rate. In 2003, they owned about 8.2 million acres, according to Timber-Mart South. By the middle of this year, they held about 20.5 million acres.
While timberland investment companies have fared well so far, it remains to be seen how they hold up through an extended economic downturn, Tuchman said.
“I think the real test will be the first six months of 2009,” he said.
Central Oregon land
Fidelity has held off from major logging operations in Skyline and around Gilchrist, while it decides whether to sell the land to the Deschutes Land Trust or the state, said Chief Operating Officer Greg Lane.
That’s unusual for an investment group that owns forests, said Tim Lillebo, Eastern Oregon advocate for the conservation group Oregon Wild. Historically, timber investment companies have sold off or developed the most profitable real estate parcels, then heavily logged the remaining forests, he said.
Many of Central Oregon’s outlying communities were developed by timber companies acting like early versions of timber-investment companies, Lillebo said.
“They end up going back and taking almost everything of every value, cutting the land again until there’s almost nothing left as far as timber resource,” Lillebo said. “Then they go ahead and sell off chunks of land (for real estate).”
The Fidelity land doesn’t fit that model and still has substantial environmental value, Lillebo said.
“The Fidelity situation is definitely different because there is this possibility of turning over a large chunk of land,” Lillebo said. “There is some real value there.”
Hal Salwasser, the dean of the Oregon State University Forestry Department, disagreed with Lillebo’s assessment of the Timberland Investment Management Organizations.
“I’m not aware of any of these operations where the acquiring entity has sold what they could for real estate and clear-cut all the rest,” Salwasser said.
“It certainly changes the objectives for which the land is managed from their previous, typically industrial owner, but sustainable forestry is a key part of all of the packages I’ve seen so far.”
For now, Fidelity’s first priority is selling some of its massive holdings in Oregon, Lane said. But the company may take advantage of low real estate prices to buy more timberland.
“I think there are more buy-side opportunities available today, certainly, than there have been in the last several years,” Fidelity’s Lane said. “We’re also being very, very prudent in what we’re looking at and what we’re contemplating moving forward.”
Keith Chu can be reached at 202-662-7456 or at kchu@bendbulletin.com.
