Timber Cruise

For this month’s issue focused on land-based businesses, we turned to Craig Blair to give us an overview of the timber industry. Blair is the president and CEO of Birmingham-based Resource Management Services, the third largest Timber Investment Management Organization in the U.S. TIMOs help investors—large institutional investors—assemble investment-grade timberlands for their portfolios. They also manage the timberlands. Resource Management takes care of more than 2.5 million acres, mostly in the South, but also in other parts of the U.S. and in Australia, Brazil, China and New Zealand.

We’re in the sixth year of the worst decline in the housing market since World War II. It began falling quickly in ’07. Timber markets won’t recover until housing bounces back. Before the recession, housing starts were at an annual average of 1.5 million starts, and that went down to 550, 000 in 2009. We had a little recovery last year and a little more this year.

The current price of timber is starting to affect timberland values. But the value of timberland, that package of assets, is more driven by investor demand for timberland—capital allocated for timberland. We’ve seen a period, in 2008 and 2009, when liquidity came out of the market. People wanted to sell, and prices were pushed down rapidly. The price didn’t reflect the change in timber prices, but, rather, the fact that there were not a lot of people in the market. Even in this correction, land values have dropped during the correction by about 15 percent over three to four years.

Investors know that timber has a pretty good track record for preserving capital. Timberland is usually a less volatile asset in terms of its value. Corrections in value play out, but it’s not a real saw-tooth market. In the last three years, there have been negative returns broadly in timberland indexes, but it’s down by a single digit in down years, not by 20 to 25 percent. 

Timberland is now part of a core investment portfolio. Investors want to keep some of their portfolio in real estate all the time, and we’ve reached that point now in timberland. There is a ready supply of capital, provided the values in the marketplace are reasonable. There will be sufficient demand for the longer-term investors—endowments, foundations, institutions—to support the asset class. Investment-grade land, if you look at the whole world, is about $200 billion. It compares to the market capital of a Google. Investment-grade timberland is a pretty select subset of trees, a pretty small asset class. 

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There are probably 20 TIMOs in the U.S., and, among those, if you measure in terms of value of assets, we’re probably third. Hancock Timber Resource Group, in Boston, is the largest. The Campbell Group, in Portland, Oregon, is second and we fall about third on the list. There is one in Atlanta, one in Jackson, Mississippi. At the end of 2011, we had $4.3 billion in assets under management in the U.S.

The management part of what we do is more important, toward creating value, than the buying and selling of timber. We want to buy with discipline and at fair prices, but our company is really organized around managing these plantations. We have a total of 165 employees, and 160 of those are devoted to the ongoing management of assets and only 10 to buying and selling.

The last of the large sales of timberland by integrated forest product corporations was in 2007. In the South, there was probably 40 million to 60 million acres that traded hands between 1998 and 2007. There are some people who are concerned that there has been increased fragmentation in timberland ownership, to the degree that it might make owners less responsible conservationists. While there is a little less ownership concentration for those 40 million to 60 million acres, there is not a great deal.

If you look at the area of land in the urban and suburban categories versus rural, it’s a pretty small percentage. Any timberland owner in the South is going to see civilization growing out to him, and there will always be people who have hopes of selling a portion of their land holding to convert to other uses, but that’s a small percentage of the total. Most of what we have acquired is in very rural areas.

The growth that we’ve had in the last three to four years is a result of our developing our non-U.S. timberland investment business. It’s client driven. Investors were saying they’d like to get their timberland diversified outside the U.S. We expect to have twice the growth outside the U.S. than in the U.S. over the next five years.

We now have offices in southern Brazil and Auckland, New Zealand and in Hong Kong. We’ve added 25 people over the last three to four years, some of them in the office in Birmingham. We have people in those countries, but some of the support can be done from Birmingham. As we continue to grow, we will be building a similar, vertically managed team in those countries. If you operate in Brazil, you have to speak Portuguese, but, in the tree business, there is more that is similar than different.

You can’t go into Chile just to manage 1, 000 acres. The size of the investment has to be enough to allow us to achieve an operating scale that will allow us to understand and manage the risk. We like it to be, over a period of time, an investment of $500 million to be able to go into those areas. At this point, total assets outside of the U.S. are about $300 million, compared to over $4 billion in the U.S.

The pinelands in Brazil are loblolly pine—not native, but have been planted extensively in the last four to five years. They also have eucalyptus, which is not part of our assets now, but we expect it to be. In New Zealand, it’s traditional pine. They are all plantation assets, all certified by third party standards to be sustainable.

Chris McFadyen is the editorial director of Business Alabama.

Interview by Chris McFadyen

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