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Timber growing on investors as managers look at new markets

Dania Zinurova
Dania Zinurova

A new group of institutional investors is committing capital to timber, aiming to benefit from attractive investments in new markets overseas.

The asset class, also called forestland, is small but growing. Institutional capital invested in timber grew to more than $57 billion as of June 30, up from less than $1 billion in 1989, according to Boston-based forestland research firm RISI Inc. A number of pension funds — including the Oregon Investment Council, which runs the $69.7 billion Oregon Public Employees Retirement Fund; the $103.6 billion Washington State Investment Board and the $6 billion Missouri Local Government Employees Retirement System — as well as sovereign wealth funds like the $5 billion Fundo Soberano de Angola and the $51 billion Alaska Permanent Fund Corp., have made additional investments or increased allocations to timber over the past year.

Institutional investors worldwide are building their timber investments for diversification from traditional asset classes and even commercial real estate, said Dania Zinurova, manager research, diversifying strategies in the Sydney office of consulting firm Towers Watson & Co.

Investors get a stable core-type return with very little volatility, Ms. Zinurova said. And even though returns plummeted last quarter, annual returns have been 9% to 10% over the past three years, according to the National Council of Real Estate Investment Fiduciaries' timberland indexes.

While 80% to 90% of the timberland investment is now in the U.S., Canada, Australia and New Zealand, more investors are looking at emerging and semi-mature forestland in Latin America, Asia, Africa and Europe, according to the 2015-2019 Timberland Investment Outlook from timber manager New Forests, a timber manager based in Sydney.

In June, money manager TIAA-CREF and subsidiary timber manager Greenwood Resources LLC closed on a $667 million global timber company, Global Timber Resources LLC. Global Timber Resources will invest in land throughout North America, Latin America, Europe and Asia. The company has capital commitments from several investors, including Canada's C$240.8 billion ($182 billion) Caisse De Depot et Placement du Quebec, Sweden's 293.9 billion kronor ($39.6 billion) AP2, and the U.K.'s 16 billion ($24.8 billion) Greater Manchester Pension Fund.

In December, the Church Commissioners for England, London, bolstered its growing timber portfolio — about 4% of its total 6.7 billion assets — buying a 49 million timber portfolio.

Other managers including Campbell Global LLC (which changed its name from Campbell Group in 2014) and Hancock Timber Resource Group now offer global strategies.

"Steady increase'

“Campbell Global has observed a steady increase in investor appetite for timberland through both new investors to the asset class and investors expanding their targeted investment regions,” said Steven King, director of global business strategy at the Portland, Ore.-based firm, in an e-mail.

This is part of the evolution of the timber asset class, he said. “For decades, North American institutional investors have shown a healthy demand for timberland investments located in the U.S.,” Mr. King wrote. “As the asset class matured and demonstrated a track record with good returns, modest volatility and low correlations with other asset classes, it drew allocations from investors domiciled outside North America. Over time, investors have expanded their global geographic scope for similar top-tier timberland assets.”

These investors and managers are looking to take advantage of global demographic trends, said Michael Underhill, chief investment officer at Pewaukee, Wis.-based real asset manager Capital Innovations LLC. As China is moving to an industrial economy, demand for timber imports from North America has gone up dramatically, with log imports up 20% in 2014, Mr. Underhill said.

But increased investor interest is leading to problems, including higher timber prices and increased competition for assets, the New Forests' timberland report noted.

Still many investors are undeterred. “The fundamentals of the asset class are terrific,” said Vince Smith, deputy state investment officer and head of the investment group of the New Mexico State Investment Council, Santa Fe, which oversees $20.58 billion in assets. So far, the council has committed $250 million to timberland, with $50 million going to Forest Investment Associates and $100 million each to Brookfield Asset Management and Hancock Timber Resource Group.

“A large portion of return comes just from biological growth — if the sun shines and the rain falls, the trees grow and along with them, our investment,” New Mexico's Mr. Smith said in an e-mail. “Valuations are quite high at the moment, however, and we're having a bit of an issue getting new money to work.”

Council officials think that part of the problem lies with more institutions investing in timber with long-term capital, poring additional capital into a relatively small asset class, he said. “We remain confident that over time we'll be able to acquire and maintain the exposure we desire at appropriate prices,” he said.

Despite a reputation for low volatility, timber investors have had a bumpy ride, said Towers Watson's Ms. Zinurova. Returns were outstanding for five years until 2008 when they dipped into negative territory. In 2012 returns began to pick up again, she said. The NCREIF Timberland Fund & Separate Account index gross return was 10.45% for the year and an annualized 9.84% for the three years. By comparison, the NCREIF Property index had a 12.72% net return for the same one-year period and an annualized 11.47% for the three years.

New Mexico's Mr. Smith said that recent returns are one of the knocks against timber. “The "pro' is the fundamentals of how return is generated from this asset. I'd say that the "con' is that timber isn't the largest of asset classes and the current pressure of so many institutions wanting to move money from traditional publicly traded stocks and bonds to alternatives of all types is putting upward pressure on valuations and reducing the near-term attractiveness of new investments.”

Some investors are taking advantage of the higher valuations to sell mature investments while adjusting their timber strategies. The California Public Employees' Retirement System, Sacramento, is reviewing its forestland program as part of the $292.2 billion fund's “efforts to reduce risk, costs and complexity,” said spokesman Joe DeAnda in an e-mail.

Selling portion of portfolio

Sources said the fund is in the process of selling a portion of its timberland portfolio, as much as 294,000 acres. It has $2.4 billion invested in timberland as of March 31, 2014, with a target of 1% of the total fund.

“We invest in these assets through external managers who have the authority to buy and sell assets on our behalf,” Mr. DeAnda wrote, saying he could not speak about any particular deal.

Campbell Global's Mr. King said he expects to see more sales in the U.S. and other core timber markets as many of the commingled funds reach the end of their terms.

Many investors are focusing on separate accounts and direct investments as a way of avoiding higher fees of closed-end timber funds.

The NZ$29.32 billion (US$18.6 billion) New Zealand Superannuation Fund has been investing in timber since the 2005 and has 5% in the asset class, mostly through direct investments and separate accounts. CalPERS has two separate accounts: one with Campbell Global that includes two distinct portfolios in the southern U.S., and one with Sylvanus LLC that includes properties in Brazil, Guatemala and Australia.

Some larger U.S. pension funds also are making more direct timber investments. In September, the Oregon fund and the Juneau-based Alaska Permanent Fund made a total of $300 million in commitments to a timberland joint venture managed by alternatives manager Silver Creek Capital Management and real estate investment trust Plum Creek Timber Co., officials from both plans confirmed. Washington State made a $300 million commitment to the joint venture called Twin Creeks earlier in the year.

Twin Creeks is expected to put $1 billion in timber, with about five public pension funds committing $750 million and $250 million coming from a combination of capital and timber assets from Plum Creek, said Bob Ratliffe, a managing director at Silver Creek Capital Management, Seattle. n

This article originally appeared in the October 5, 2015 print issue as, "Timber growing on investors as managers look at new markets".