What Is a Timber Investment Management Organization?
A Timber Investment Management Organization (TIMO) is a management group that aids institutional investors in managing their timberland investment portfolios. A TIMO acts as a broker for institutional clients to find, analyze and acquire investment properties that would best suit their clients.
- Institutional investors looking to invest in timber and timberland often use timber investment management organizations (TIMOs).
- TIMOs serve as middle-men that research and acquire timber investments and subsequently manage those investments on behalf clients.
- Timber is often seen as a good portfolio diversifier that can hedge against inflation.
Understanding Timber Investment Management Organizations
TIMOs developed in the 1970s after Congress passed legislation called the Employee Retirement Income Security Act, which encouraged institutional investors to diversify their portfolios. Before the legislation, investment in timberland properties was made chiefly by both large and small firms in the forestry industry. By 2007, a study by the Realtors Land Institute (RLI) showed that approximately $60 billion in land was managed by TIMOs.
Initiall,y TIMOs were viewed positively by forest conservationists, who felt separating the owners of forest lands from the wood mills who use the lumber was a good idea. Later, conservationists came to understand the TIMOs were not looking to maximize conservation of America's forest lands. Instead, TIMOs are focused on maximizing the financial return for investors. According to a study published by the Pinchot Institute for Conservation, private forest lands are being converted for development at a rate of 6,000 acres per day.
Forisk Consulting tracks the largest TIMOs in the United States. The table below lists the 2015 top 10 U.S. timberland owners by acreage, and compares this to their 2014 rankings. TIMOs hold eight of the top 10 positions.
Why Invest in Timberland?
According to RLI, timberland returns have compared favorably with stocks but with much less risk and volatility. Others say timberland returns have varied over time as the industry has matured. Returns were negative for a year after the financial crisis of 2008, but have since been increasing. U.S. timberland investment performance is measured by the NCREIF Timberland Property Index. According to NCREIF, investment returns from U.S. timberland in 2017 was just 3.63% compared to 21.83% for the S&P 500 equity index in the same period. One year's performance is not enough to accurately measure long-term investment performance, but this data serves to demonstrate how annual returns differ for various asset classes.
It is true that TIMOs can help institutional investors diversify their portfolios into U.S. timberlands, but such real estate investments are probably best used as part of a well diversified portfolio with multiple asset classes, such as stocks, bonds and commodities.
In addition to wealth-building opportunities created by market changes, there are a number of other reasons to consider adding timber to a portfolio.
- The demand for timber is increasing.
As of 2008, the demand for timber has been increasing as forest-related product development grows. Even paper recycling efforts have had little effect on demand, and according to the Society Of American Foresters, every American consumes a 100 ft. tree each year.
- Timber is an inflation hedge. Timber increases in value "on the stump" at a greater rate than inflation. According to legendary investor Jeremy Grantham, timber prices in the last century (~1905-2005) have also grown at a rate that is approximately 3% greater than inflation.
- Timber returns beat stocks. Measuring returns using the National Council of Real Estate Investment Fiduciaries (NCREIF) Timberland Index, timber investment returns exceeded those of the S&P 500 from 1990 through 2007. In that period of time, the NCREIF Timberland Index annual compounded return was 12.88% versus 10.54% for the S&P 500 index. This excess in return was also provided with less volatility as shown by the Sharpe ratios for the same period (1.06 for timber, versus .45 for the S&P 500), underscoring the risk/return benefits of timber over the overall stock market.
- Timber has low correlation to other asset classes. Commercial timberland prices are impacted by a different set of market and economic factors than other asset classes. Because prices are not affected by the same factors, timber returns are not correlated to returns of other asset classes, such as stocks, bonds and real estate. The addition of a low correlation timberland asset will increase the diversification of an investment portfolio. The NCREIF Timberland Index returns from 1990 through 2007 showed moderate to weak correlation against equity and fixed-income indexes and a negative correlation to real estate.
- Investment in land as an appreciating asset.
Although the land necessary to grow timber stock can be leased, the majority of timber investors purchase the land. The land supply is limited and demand continues to grow as the population and commercial development expands. Depending on location, some property can be targeted as "higher and better use" land that can be sold to developers at a premium, providing additional appreciation benefits for timber owners. The collapse of markets that require timber as inputs looms as a potential risk. However, timberland is a natural warehouse where stock can be stored on the stump until markets and demand rebound. While natural disasters, such as unfavorable weather and fire can also reduce stock, even events such as the Mount St. Helens eruption in 1980 did not wipe out investors. Damaged stock was still valuable and was sold to lumber and paper companies, then replanted for future profit.