If Paul Bunyan were chopping logs today, he'd probably be working for a retirement fund.
The nation's 504 million acres of timberland, home to wildlife and the source of everything from deck frames to copy paper, have been the focus of a massive multi-year auction, the outcome of which is set to change the rules for wood companies and conservationists alike.
"In the last 10 years, there's been an explosion of interest in timberlands," said Bob Izlar, director of the University of Georgia's Center for Forest Business.
One such sale is going on now. Paper and wood maker Temple-Inland, Inc. has said it is seeking buyers for most of its 1.8 million in Southern U.S. timberlands. The acquirers are likely to be financial investors that include insurance companies and specialized asset managers.
And while these types of investors continue to log, their growing role in the industry has cast a long shadow over what happens to these forestlands 10 or 15 years from now, when some timber-oriented funds are scheduled to wind down their investment.
"There's an uncertainty in the general conservation community about the long-term predictability that [these lands] will stay in timberland and won't go into a golf course," said Izlar, who is considering a study on the impact of ownership changes.
The forest industry - including companies like International Paper Co., Meadwestvaco Corp. and the now privately-owned Boise Cascade -- sold over 31 million acres in the 10 years through 2006, or the majority of all large timberland transactions in that period, according to data provided to MarketWatch by industry publication Timber Mart-South.
About 25 million of the sold acres, or 80%, ended up in the hands of financial investors, says Timber Mart-South. Some were a type of asset manager-cum-logger called a timberland investment management organization, or TIMO.
Watching plants grow
What's the attraction? In a nutshell, financial investors have found that they can swing the ups and downs of a forestry cycle better than companies that run sawmills.
Timberlands "are worth more to investors, especially private investors whose sole strategy is an investment in timberland, than they are worth in the stock value of publicly traded companies," said Bruno Fritschi, chief executive of Resource Management Service LLC. His Birmingham, Ala.-based company manages $3.3 billion in timberland assets for its clients.
Six months of cheap timber prices can splatter red ink all over a lumber company's earnings, angering investors. When the housing market started to skid late last year, clobbering lumber prices, integrated wood producer Weyerhaeuser Co. reported lower timberland earnings and warned profits from that division would likely slide further this quarter.
But for the manager of a timber fund, a downturn in prices doesn't usually cause such pain. He is more concerned about the marked-to-market valuation of the land, which takes into account prices fetched at industry land sales, the value of the trees, as well as logging income.
Unlike other agricultural crops, timber value increases as it ages. Taller trees, the type used for beams or telephone polls, generally carry higher prices than young wood that ends up in pulp and paper mills.
And financial investors can ride out a dip in the cycle if prices falter, in contrast to manufacturers that need to show shareholders rising revenues in each of their divisions.
"If you don't like the price, you can hold on to timber," said Fritschi of Resource Management, which bought 2.6 million acres of forestland from International Paper in November.
The sector's returns aren't jaw-dropping, but over the longer term they have outperformed major indexes.
An index of timberland returns compiled by the National Council of Real Estate Investment Fiduciaries, or NCREIF, showed a 13.7% return, slightly under the 15.8% return posted by the S&P 500. After three years, NCREIF's timberland property index gained 14.7%, outstripping the S&P 500's 10.4% advance. And over five years, timberland has returned 10.6% vs. 6.2% for the S&P 500.
With its peculiar dynamics, timberland fits into the growing class of so-called alternative assets.
"Returns on timberland properties tend to be uncorrelated with returns on other assets like stocks, bonds and even commercial real estate," said Courtland Washburn, chief investment officer for Hancock Timber Resource Group.
The unit of Canadian insurer Manulife Financial Corp. is the largest timberland investment manager, overseeing $4 billion in U.S. assets for its clients.
Timberland values have been buffered from the recent downturn in wood prices because owners can choose to sell younger trees to paper markets, where prices have remained high, if wood products fall, he said.
Last year, the price of timberland sold in the South, where much of the timberland sales take place, rose 3%, to $1,195 an acre. That's a much slower increase than the 11% advance posted in 2005 and reflects the housing market's impact on land prices, says Timber Mart-South.
But timberland prices have still held up a lot better during the housing market retreat than the price of standing timber itself. Southern prices for pine sawtimber, used mainly for homebuilding, fell 4.4% last year to an average $38.25 a ton as new home construction fell.
Rush for the exit
Interest from Hancock and other investment managers has pushed up the price wood companies can fetch for their acreage.
Two years ago, International Paper set out to sell most of its timberlands after concluding it no longer needed to own the trees providing wood fiber for its plants.
Also helping prop open the sales door was the "big realization that the land was worth more to other people than it was to us," said IP spokeswoman Amy Sawyer.
So far it has sold 5.7 million acres for $6.6 billion.
Higher prices for timberland have put pressure on companies like Temple-Inland to hang for-sale signs on their own timber holdings.
Following calls by activist investor Carl Icahn to tighten its business structure, the Austin, Texas company said in late February it would sell most of its 1.8 million acres of timberland and spin off its banking and real estate units.
Wood companies' land sales have accelerated in the past two years. In 2005, the number of acres sold to private investors, excluding states and conservation groups, jumped 61% from the previous year to 4.2 million acres. The number of acres sold last year increased another 41%, to 5.9 million acres, according to Timber Mart-South.
In fact, so many lumber companies have sold their timber that Weyerhaeuser stands out as the only major wood products company clinging to its land. Some big companies, such as Plum Creek Timber Co. and Rayonier Inc. have taken a totally different tack and become real estate investment trusts that derive most of their income from land holdings.
Still, Weyerhaeuser has not escaped the scrutiny of shareholders seeking a change. Franklin Mutual Advisers LLC has clamored for Weyerhaeuser to unload its timber or sell everything else and turn itself into a real estate investment trust. The company, for its part, has said it is analyzing "alternative structures" in the timberlands business.
Sales mean opportunity, uncertainty
Land auctions have also provided an opening for groups trying to save woodlands by buying acreage and then ripping up the development rights.
That's pretty much what the Nature Conservancy did last year, when it partnered with another conservation group and private investors to buy 218,000 acres of International Paper's forestland in the South.
The $300 million deal was the region's largest-ever private land purchase by conservationists and illustrated a new tactic used to stretch their forest-protection dollars. While the Nature Conservancy retained the development rights, its financial investor partners got the right to continue to log the land.
"In most cases, our conservation goals can be accommodated in a type of working forest environment," said William Ginn, director of the global forest partnership at the Nature Conservancy. The strategy helps the group buy bigger swathes of land. Buying the rights to control development on the property can cost 30% to 50% of what it would cost to buy the property outright, he noted.
Still, Ginn called the forest industry's bulk land sales a "good news-bad news story" for conservationists.
States and conservation groups are getting a chance to buy ecologically sensitive land that had been owned by a single owner for a century.
But the trend also means there is an increasing number of entities owning the nation's timberland. That fragmentation could speed up real estate development if financial investors get ahold of it and quickly sell off choice parcels to help cover the cost the overall deal, Ginn said.
Timberland financial investors, for their part, say the land they manage is still worth more as timberland than anything else. But that doesn't mean some acres won't eventually get paved over.
"The large majority of timberlands managed by entities like us have a highest and best use that's timber production," said Hancock Resource's Washburn.
"But certainly portions located near expanding cities can over time accumulate higher value in non-timber use," he said.
Meanwhile, the trend in the United States is likely to continue as investors pressure the last wood products producers with big holdings to narrow their business focus.Market Watch
