Investor confidence in timber remains high

GPs have told us they have noticed an uptick of interest from new investors, with the smaller end of the market already seeing discounted opportunities.

The price of lumber traded on the Nasdaq stock exchange has certainly suffered a coronavirus-linked slump, with the timing of an almost $200 drop coinciding with wider financial turmoil.

From a 2020 high of $463 per 1,000 board feet of lumber on February 20, prices fell to a low of $259.80 on April 1, then steadily rallied to close at $346.20 on May 18.

Stock price movements are a useful indicator of sentiment and market trajectories, but with a long-play asset such as timber, you invariably have to dig a little deeper for a clearer picture.

Closer to the ground, GPs are keeping a watchful eye for further signs of trouble but if their anecdotes on fundraising and acquisitions are anything to go by, it is far from a market in trouble.

Several GPs have reported increased interest and optimism despite the trading data as land values have held. At the same time, the specter of sawmills reducing their capacity to avoid storing up large inventories as demand becomes stunted has been chalked up as a short-term reaction.

One of the first reasons for the continued confidence is the US’s decision to declare its wood industry an essential service from the start of the lockdown, meaning the mill and forestry maintenance workforce has been allowed to continue operating.

And most importantly, as one of the asset classes that requires the most patient capital in any field that private capital invests into – Kentucky Teachers’ assuming a 30-to-50-year hold is a timely reminder of how patient some are willing to be – many stakeholders are only too keen to point out that timber’s ability to ride out market turmoil is one of its biggest strengths.

Timberland Investment Resources Europe, which buys in the 40,000-acre range in the US, is “not gung-ho” but remains optimistic primarily because of this, said managing partner Gian Paolo Potsios.

“If you look at past crises, we’ve been successful in holding up values and rebounding quite quickly,” said Potsios, adding that the rosiness of the outlook will hinge on how long the pandemic lasts. “If the crisis extends, you may see an impact in not only timber prices, but property values may also start to decline by the third or fourth quarter.”

With the firm having just secured $100 million towards its $200 million target for Fund II and with capital to deploy, price drops could play into its hands. No such opportunities have presented themselves at TIR’s end of the market yet, said Potsios, but the firm has had some joy elsewhere.

“I’ve had several phone calls from investors – there has definitely been a revamp [in interest] because, after all, there are not many asset classes that are able to give you annual cash returns of around 3-4 percent and an IRR over time of around 8-10 percent, with a very low risk profile,” he told Agri Investor.

Domain Timber Advisers, which buys in the 1,500-acre range and sells to retail investors or packages them up to be sold to institutional investors, is equally confident.

The firm has moved to acquire two properties in the last two weeks from family owners who have suddenly found themselves in need of liquidity, said Domain Timber managing director and chief operating officer Joe Sanderson

“They’ve got financial issues and they’re selling properties at 80-90 cents on the dollar,” said Sanderson. “I think you’ll also see some moderately distressed pieces coming out of the timber REITs in roughly the next two months.”

Sanderson added that the LPs in the separate accounts the firm manages have said they would like to see acquisition return targets closer to 9 to 10 percent due to the distressed nature of the economy, which he says is “not an unreasonable expectation” given the properties becoming available.

While TIR has been challenged by the difficulty of getting new and interested LPs to commit without a face-to-face meeting, Domain has been trying to find ways to make its acquisitions process nimbler so it can snap up new opportunities.

The key and consistent message from both, however, is that confidence and investor appetite remain strong.

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