Notes on Timberland Research

F O U R S T A T E S F O R E S T R Y C O N F E R E N C E

Notes on Timberland Research

F O U R S T A T E S F O R E S T R Y C O N F E R E N C E

I D A B E L , O K

M A R C H 9 , 2 0 1 2

J A C K L U T ZF O R E S T E C O N O M I S TF O R E S T E C O N O M I S T

F O R E S T R E S E A R C H G R O U PF O R E S T R E S E A R C H G R O U P

Timberland Research

I N T R O D U C T I O NI N T R O D U C T I O N

T R U T H O R M Y T H ?

Introduction

Introduction

Presenter: Dr. Jack Lutz

Forest Research GroupFocus on institutional investment, wood supply and

Presenter demand

Forest Research Noteshttp://www.forestresearchgroup.com/Newsletter_FRG.htm

University of GeorgiaUniversity of Georgia

University of Maine

F li i l dFormer lives include:Hancock Timber Resource Group

FourWinds Capital Management

James W Sewall Company (timberland appraisals)James W. Sewall Company (timberland appraisals)

Container Corporation of America (now Rock-Tenn)

Truth or Mythy

NEGATIVELY CORRELATED

STORE ON THE STUMPS O O S U

INFLATION HEDGE

8-10% REAL RETURNS

REITS = TIMOS

Truth or Myth?

T

Negatively Correlated

MythMythAnalysis shows timberland is NOT negatively correlated with financial assets

All empirical data shows timberland is positively p p ycorrelated with financial assets

TruthTimberland is NOT CORRELATED with financial assets

Negatively Correlated

Since 1960Since 1960 Since 1987 (NCREIF)Since 1987 (NCREIF)Since 1960Since 1960 Since 1987 (NCREIF)Since 1987 (NCREIF)

Inflation-CPI Inflation-CPI

Intermediate-Term Govt Bonds

U.S. T-Bills

Intermediate-Term Govt Bonds

U.S. T-Bills

a o C

Corprate Bonds

Long-Term Govt Bonds

Govt Bonds

1960-2003

1960-2009

Corprate Bonds

Long-Term Govt Bonds

Govt Bonds

1987-2003

1987-2009

S&P 500

Small Cap Stocks

S&P 500

Small Cap Stocks

-0.4 -0.2 0 0.2 0.4 0.6 0 0.2 0.4 0.6

Truth or Myth? Correlation has changed over timeNegatively Correlated Example using 10-year investment

periods

0 6

0.8

1.0

0.2

0.4

0.6

-0.4

-0.2

0.0 Since 19

60

Since 19

87

196

1-1970

196

6-19

75

1971-19

80

1976

-198

5

198

1-199

0

198

6-19

95

199

1-200

0

199

6-20

05

200

0-20

09

-0.8

-0.6

Truth or Myth? Truth

T f t b t h t d t Store on the Stump

Trees grow for years past best harvest date (unlike e.g., tomatoes, commercial real estate)

Total volume increases

Product (value) shift increasesProduct (value) shift increases

MythWood supply agreements

Debt payments

Investor cash flow requirements

Logging force

New roof or kid/grandkid off to college

Truth or Myth?

Inflation Hedge

• Three main markets:

• Sawtimber• Mean-reverting (real)

• Small log• Mean-reverting (real)

• Land• 1-3% real increase

Truth—at the national level

Not so much at the regional level

What about between countries?What about between countries?

Truth or Myth? “Hedge” looks only at correlationInflation Hedge But timberland has almost always beat

inflation (stocks haven’t)

0.6

0.8

1.0

0.0

0.2

0.4

S S 1 1 1 1 1 1 1 1

-0.6

-0.4

-0.2

Since 19

60

Since 19

87

96

1-1970

96

6-19

75

971-19

80

976

-198

5

98

1-199

0

98

6-19

95

99

1-200

0

99

6-20

05

-0.8

S&P 500 Timberland

Truth or Myth? Legend—based on historical fact in US8-10% Real Returns Future returns expected to be ~4-6%

30%

35%

40%

10%

15%

20%

25%

-5%

0%

5%

10%

1985 1990 1995 2000 2005 2010 2015

-10%

Appreciation EBITDDA Total

Truth or Myth?

REITs = TIMOs

Returns are quite differentk hi ( lStocks vs. asset ownership (Real Estate

REITs vs. commercial real estate)

Timber REITs may be a great addition y gto your portfolio (Apple? Berkshire Hathaway?)

Cadillac vs skidder?Cadillac vs. skidder?

Truth or Myth?

FTR Index NCREIF S&P 500

FTR Index 1.0000 -0.0203 0.6655

NCREIF 1.0000 0.2432

REITs = TIMOsS&P 500 1.0000

FTR Index is negatively correlated with NCREIF Timberland Index, strongly correlated with S&P 500

When stock market panics, Timber REITs are caught in the d b l d h

30%

40%

50%

stampede, timberland sits there growing trees

-10%

0%

10%

20%

1985 1990 1995 2000 2005 2010

-40%

-30%

-20%

-10%

-50%

NCREIF FTR Index S&P 500

Truth or Myth? Negatively correlated: MythNegatively Correlated

Store on the Stump

I fl ti H d

Store on the stump: Depends

Inflation hedge: ~Truth

8 10% real returns: Hi t i ll TruthInflation Hedge

8-10% Real Returns

REITs = TIMOs

8-10% real returns: Historically, Truth

REITs = TIMOs: Myth

Summary