Rare valuation dip raises questions for US timberland

Insiders say a depreciation of nearly 1% for Southern assets could reflect methodological quirks or appraisers' lower expectations on timber prices.

An unexpected dip in appreciation for timberland holdings in the US South is prompting fears of tougher trading conditions among industry players.

In its second-quarter index, published last week, the National Committee of Real Estate Investment Fiduciaries said a 0.94 percent capital depreciation for US South assets outweighed income earnings of 0.58 percent to produce an overall Q2 growth rate of -0.35 percent for the region.

“Market value per acre for the South continues to follow closely with the Total Timberland Index market value per acre,” said NCREIF of a region comprising 16 US states containing 307 of the 452 properties measured in the index.

Jack Lutz, an economist at Maine-headquartered Forest Research Group, told Agri Investor that because most timberland appraisals are carried out during the fourth quarter, it is unlikely that the change in appreciation return came as a result of a change in appraised values.

“First thought, did capital appreciation weigh down returns?” said Lutz. “That could have been from tree planting and road building in the spring (just a thought).”

Kevin Bates, vice-president of timberland investment at Olympic Resource Management, told Agri Investor that because depreciation for the South was rare, he was also curious as to whether capital expenditures in the region may have played a role.

“We [ORM] assume, absent any market evidence to the contrary, that anything that we’ve spent planting, road building, etc, adds to the value of the property by the amount of the capital expenditure. Then, when you get an actual appraisal, that might increase it or decrease it,” Bates explained.

NCREIF told Agri Investor that capital expenditures “should” be submitted by every committee member every quarter.

“Based on the amount of capital expenditures seen each quarter relative to the total market value, capital expenditures should not cause a significant shift in capital appreciation returns for the NCREIF Timberland index,” a NCREIF representative wrote.

NCREIF representatives wrote that capital expenditure costs and appraisals values are submitted to it separately and that the methodology of how to incorporate such costs likely vary by appraiser. The representative wrote that members of NCREIF’s timberland committee do not have access to whether individual submissions contain capex.

If appraisals have played a role in contributing to the Q2 dip, Bates said, then that raises questions about appraisers’ general outlook for a sector closely tied to US housing markets. In recent years, the region’s abundant log supply has encouraged timberland owners to delay harvest in hopes of encouraging an uptick in prices, Bates explained, so many owners are now moving to begin harvesting at the first signs of improvement in housing starts, keeping a lid on prices.

“Are we starting to see appraisals decline to reflect the possibility that these log prices are really a new reality, and that appraisers have really been optimistic about appraised values in the South for quite a while now?” said Bates. “That’s a question, not a statement.”

Campbell Global and Molpus Woodlands Group, which are both active in the US South, declined to comment.

Overall, US timberland markets produced a 0.48 percent return during the second quarter, according to NCREIF. That was lower than the 0.92 percent growth registered in the first quarter and 0.70 percent growth during Q2 of 2017.

NCREIF’s index is based on a survey of 453 timber properties with a cumulative value of $25.3 billion.