NCREIF index shows earnings driving growth in US timber markets

While the sector improved in Q3, Forest Research Group economist Jack Lutz tells Agri Investor the next quarterly report will provide a clearer picture of the market’s response to the US-China trade dispute.

US timber markets grew by 1.02 percent during the third quarter, outpacing both the previous quarter and the same period of 2017, according to the National Council of Real Estate Investment Fiduciaries.

In the latest edition of its quarterly index, NCREIF reported that 0.21 percent growth in appreciation was bolstered by 0.81 percent growth in earnings that constituted an improvement of six basis points over the previous quarter and 8 basis points over the same quarter last year.

Total index timberland values rose to $1,834 per acre, with regional indexes ranging from $1,785 per acre in the South to $658 per acre in the Lake States.

­Regionally, NCREIF highlighted that, after a year of negative or flat returns, timberland in the Lake States returned to 0.77 percent growth – driven entirely by earnings, while the Northwest grouping of California, Oregon, Washington and Idaho led regional returns for both the quarter and the preceding year.

“The total quarterly return for the Northwest was 2.76 percent, fairly evenly split between appreciation and EBITDDA return,” wrote NCREIF. “The South continued to drag the index through 2018, with third-quarter total return of 0.33 percent driven by a negative appreciation of -0.25 percent and a below average EBITDDA return of 0.57 percent.”

Forest Research Group economist Jack Lutz told Agri Investor that, because most timber appraisals take place during the fourth quarter, it is still too early to say definitively whether there was any change in sentiment among timberland appraisers driving the rare second-quarter dip in appreciation seen in NCREIF’s previous Index reading.

Given what was otherwise “a quiet little quarter”, Lutz said his focus is turning to the fourth quarter, which will provide a clearer picture of how timberland appraisers are weighing both the asset’s long-term supply and demand trends as well as new factors such as the slowdown in China’s economy and its ongoing trade dispute with the US.

“Next quarter will be really interesting because most of the properties will be appraised and if there’s going to be some impact from tariffs from China, it’s going to show up then,” said Lutz. “I have spoken with at least one appraiser who isn’t sure what to do with timber prices right now.”

Harder to predict

Because appraisers are tasked not with predicting exact prices but with projecting future market sentiment, Lutz explained, their task has become particularly difficult due to the unpredictability of the Trump Administration’s foreign and trade policies. In the medium term, he said, timber values are likely to be influenced by a debate between investment managers urging patience under the assumption tariffs will be temporary and appraisers considering how much trade tensions and reduced export demand bolster the case for devaluing assets.

“You may get this difference in appraisals where a bunch of properties take a hit from the tariffs and a bunch of others don’t,” he said.

Though it’s not clear how or when such developments would be reflected in NCREIF’s quarterly readings, Lutz said that, in general, timber producers located to the west of the Cascade Mountains are more likely to have significant exposure to China’s export markets than those to the east.

According to Lutz, investors are likely to be the ones that determine whether any trade-dispute-related depreciation leads to asset sales. Though investors within pooled funds will have little control over whether assets are sold regardless of any potential changes in valuation, Lutz explained, other investors may look to play a more active role.

“When it’s a separate account, that investor can make up their own mind. If they are big enough to have separate accounts, they probably have staff somewhere that have their own view of what the world is doing,” said Lutz. “The separate account holder can come to the TIMO and say ‘We don’t care what you think, sell the darn thing.’”