MassPRIM attributes forestry portfolio underperformance to climate buyers

Director of real estate Tim Schlitzer says climate-driven purchases have produced a 'mismatch' with appraisers that contributed to underperformance relative to NCREIF’s timber benchmark.

Massachusetts Pension Reserves Investment Management Board director of real estate and timberland Tim Schlitzer said the underperformance of the pension’s timber portfolio against the NCREIF index, is in part due to the influence of a large climate-mitigation focused transaction on the index.

According to minutes of a May meeting of MassPRIM’s Real Estate and Timber Committee contained within material from an August meeting provided to Agri Investor, Schlitzer said the ongoing adjustment among timber appraisers to climate-derived demand is among factors adding “noise” to the NCREIF benchmark, which the $96 billion pension uses to measure performance of its timberland investments.

The pension’s timber portfolio returned 5.9 percent over the past fiscal year, during which time it underperformed the NCREIF timber index by about 500 basis points. The portfolio delivered a three-year return of 8.4 percent, which is in line with the benchmark.

“The largest timberland transaction that occurred in the US last year was effectively a climate buyer. It was a climate mitigation strategy that bought an almost $2 billion portfolio that ended up in the benchmark price that appraisers were probably not going to quite reach when they marked properties overall because there was such a premium paid,” said Schlitzer, who has been responsible for oversight of MassPRIM’s real estate and timber investments since 2005, according to his LinkedIn profile.

“There’s an understanding that’s being developed by the appraisers right now. So, sort of a benchmark appraiser mismatch there.”

According to the meeting minutes, Schlitzer described an influx of a “whole new class of buyers” carrying out climate mitigation strategies starting in 2021 as among the factors contributing to what had been a unique year for the asset class. In addition, he highlighted the desire among well-funded public timber companies to own more of their own supply chains to address vulnerabilities revealed by the covid-19 pandemic, as among factors leading to changing views in the market.

“The appraisers come in, and they really apply a whole different set of discount rates,” he said. “New assumptions on harvesting, new assumptions on what logs will sell for and the cost inputs. So, we typically see some noise there.”

MassPRIM describes itself as the largest timberland investor among US public pension funds by a factor of two on the strength of a $3 billion portfolio that constitutes 3 percent of its total assets. It includes 23 properties across the US, Australia and New Zealand managed by Campbell Global and Forest Investment Associates.

MassPRIM declined an interview request and shared with Agri Investor notes from the May meeting that attributed short-term underperformance relative to the benchmark to both the change among appraisers at the end of 2022 and portfolio construction. The notes highlight that its investments in Australia and the Pacific Northwest have been in place for more than 10 years and that the latter region has traditionally outperformed the US South.

“This construction has worked well over the long-term but the South saw some strength driven by population growth, anticipated new mill capacity this year as well as some climate driven purchases that drove comparable sales numbers up. (Note that actual wood prices in the region were pretty flat this year),” the MassPRIM representative wrote. “We’ll continue to monitor our portfolio construction but don’t feel that the positive long-term regional drivers related to export markets, supply and regulation have changed meaningfully.”

In his comments to the Real Estate and Timber Committee, Schlitzer described recent performance of US South timberland as “really more sentiment driven.” He also noted recent developments suggesting 2023 is presenting timberland “more of a different environment.”

“Expectations for housing starts and renovations, which really drive the asset class, are more tepid right now,” he said. “And capital, I think, has been more cautious to reflect that.”

NCREIF, FIA and Campbell Global also declined to comment.