Program on Private Forests

Institutional Timberland Investment

Large-scale private ownership of forestlands in the United States has seen radical change in the last twenty years. Growth in low-cost international fiber supply began to depress forest product markets. The larger firms in the industry responded by consolidating in order to better control supply. Many had owned timberlands for decades and carried them at very low book values relative to their market values. Industrial owners also tended to manage their timberlands as a strategic asset—securing a cheap supply of timber for their mills when prices spiked. Timberlands managed in this manner typically yielded poor returns. Timberlands were a relatively unknown commodity in the market at this time and were greatly undervalued. The vast acreage required buyers with deep pockets willing to invest in a seemingly illiquid asset.

In 1974 Congress passed the Employee Retirement Income Security Act (ERISA). This act, along with similar legislation in many states, encouraged institutional investors such as pension plans, endowments and foundations to diversify their portfolios. Recognizing that timberlands were selling at bargain prices, timberland investment management organizations (TIMOs) emerged to organize and manage partnerships of institutional investors. Without a mill to answer to, these institutional investors could manage for returns on timberland assets.

TIMOs, Real Estate Investment Trusts (REITs) and other financial buyers accounted for about 60 percent of all publicly reported timber transactions in the U.S. from 1995-1999 (Block and Sample, 2001). Institutional investment in timberland increased from about $1 billion in 1989 (Block and Sample, 2001) to about $14.4 billion in 2002, according to recent data compiled by Yale’s Program on Private Forests. Estimates of the acreage and financial value of timberlands in TIMO ownership in 2002 are presented in Table 1.

According to our research, TIMOs currently manage over 18 million acres of land valued at over $14.4 billion, including international holdings. This is a conservative estimate of the total value and acreage under TIMO management, since a few of the largest players would not disclose their holdings. It should be noted that Plum Creek is not a TIMO but is a publicly traded REIT. Nevertheless, we have included Plum Creek because 83% of its assets are timberlands. These figures indicate an average value of $793 per acre, however individual firm averages range from $399 to $1,993 per acre. This range reflects the varying geographic foci of the different firms: timberland values in the U.S. Pacific Northwest, for example, currently average about $2,000 per acre while those in the Northeast average less than $500 per acre (HTRG, 2002). Timberland values in developing countries are typically even lower.

The TIMOs listed in Table 1 range from large managers of both internal and external capital to smaller private equity managers serving institutional investors and high net worth individuals. Some firms use only equity financing, while others use leverage through various debt instruments. Some focus on one region in the U.S. while others diversify regionally or internationally. The divestiture of timberlands from integrated forest products companies has stimulated tremendous diversification in the timberland investment management industry.

Table 1: Private Equity Timberland Investment as of December 2002

* Includes timberlands under purchase agreement contracts
NA: Information not publicly available. The financial implications of these trends in forestland ownership have been well explored by the timberland investment community, but ecological implications have thus far received little attention. TIMOs confer a number of conservation benefits:

• Large tracts of timberlands have remained under management for timber rather than other less conservation-friendly land uses;
• Financial markets now assign more value to timberlands and are now a more accessible source of capital;
• Many TIMOs have partnered with conservation organizations to set aside sensitive lands and develop working forest easements.

Nevertheless, the institutional investor’s legal obligation to maximize returns for investors has the potential to conflict with the interests of long-term forest productivity.

In order to explore the implications of these changes in timberland ownership, the Program on Private Forests at the Yale School of Forestry and Environmental Studies hosted a panel discussion titled "Institutional Timberland Investment: Balancing Ecology, Finance and the Public Interest"
(3 MB PDF) on January 21, 2002 in New Haven, Connecticut. The panel addressed questions about how institutional ownership influences forest management practices, long-term forest productivity, and non-market values associated with forestlands.