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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