Timberland Investment

Investors tired of poor returns, are getting out of timberland — at what some say is the wrong time.

 

Leading the exit are CalPERS and Harvard.

 

The California Public Employees' Retirement System, Sacramento, in the third quarter sold most of its $2 billion timberland portfolio, with few plans of investing again; instead, the $358.9 billion system will focus on core real estate. CalPERS' consultant said the fund sold the investments at a loss.
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CalPERS' forestland portfolio underperformed its benchmark for the one, three, five and 10 years ended June 30. The portfolio earned 1.9% compared to the 3.8% benchmark return for the year; an annualized -2.4% (3.4% benchmark) for the three years; -1% (6.1%) for the five years; and -1.1% (4.1%) for the 10 years ended June 30. These returns do not include additional markdowns from the sale of the Crown Pine Timber portfolio, Mr. Junkin said.

 

Meanwhile, Cambridge, Mass.-based Harvard Management Co., which manages Harvard University's $37.1 billion endowment, is also selling off portions of its timberland portfolio, sources said.

 

Harvard Management Co. reported in September that natural resources, including timber, experienced a challenging year in its 2017 fiscal year and the endowment took write-downs and sold assets, some at or above their previous valuations. "Our natural resources platform will take multiple years to reposition," the report noted without providing details. Harvard is reportedly attempting to sell majority or minority stakes in a $700 million portfolio of timberland in South America.

 

Fundraising by timber investment managers is way down. Two funds raised a combined $600 million so far in 2018, down from seven funds that raised $1.4 billion in all of 2017 and eight funds that raised $3.1 billion in 2008, according to data from London-based alternative investment research firm Preqin.

 

More than 30 timberland funds manage about $57 billion of assets for investors "who cite the long-term investment horizon, low correlation with the general economy, biological growth regardless of economic conditions, and a relatively stable stream of cash flows as appealing characteristics of the asset class," according to a recent report by MetLife Inc.'s agricultural finance group, which oversees agricultural and timberland assets.

 

Matthew Lynch, Hartford, Conn.-based managing director and head of real estate and private markets at UBS Asset Management, said poor returns are driving investors out of the asset class into other real asset sectors.

 

Timberland assets earned 0.48% for the quarter ended June 30, down from 0.92% in the prior quarter and 0.7% in the second quarter ended June 30, 2017, the NCREIF Timberland index showed. The Total Timberland index had a 3.57% trailing return for the year ended June 30. Timberland market value per acre was $1,804 as of June 30, down from $1,824 a year earlier, according to NCREIF.
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Between January 2017 to June 2018, average prices for commonly traded lumber in the U.S. increased by 40%, according to the Wood Resource Quarterly. During the same period, sawlog prices were practically unchanged in the South and rose about 28% in the Western U.S.
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Some industry insiders say institutional investors are downsizing their timber exposure at the wrong time, when prices for timberland are way down. They also say the investors got into their current portfolios at the wrong time.

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Some timber managers and investors are buying timberland, seeing opportunities as some holdings are priced at a discount. In July, BTG Pactual Timberland Investment Group invested alongside British Columbia Investment Management Corp., Highland Capital Management, and Medley Management Inc. bought 1.1 million acres of prime East Texas timberland from CalPERS for $1.39 billion. The market value of CalPERS' investment in Crown Pine Timber — known as Lincoln Timber, a hedge fund of one managed by timber management organization Campbell Global — was $1.6 billion as of June 30. In October 2007, CalPERS had committed $2.2 billion to invest in 1.5 million acres in eastern Texas and western Louisiana, documents on CalPERS' website show.