Square Feet | Ventures: For Some Investors, Money Grows On Trees

WHEN a tree falls in a forest, chances are that it can be heard all the way to Wall Street, and throughout other financial circles as well.

Rayonier owns or manages 350,000 acres of timberland in New Zealand.

Once the exclusive province of businesses and individual landowners, timberland is being held increasingly by big institutions — from pension funds and university endowments to private funds and real estate investment trusts — that are looking for new ways to diversify their investments.

According to industry estimates, financial institutions now own nearly 5 percent of the forests of loblolly pine, Douglas fir and other widely harvested trees in the United States, and that percentage is expected to widen. A significant portion of the timberland is held through privately run timber investment management organizations, or TIMOs. Twenty-five or so years ago, their exposure was virtually nonexistent.

Why the interest in this asset class? For one thing, returns have been, well, solid and growing. Timberland produces revenue from sales to lumber and paper companies, with uses ranging from home building to disposable-diaper production, along with long-term gains from the value of the property itself.

At the Hancock Timber Resource Group, a TIMO with $6.6 billion in assets and 3.8 million acres under management worldwide, returns after fees averaged 13.8 percent, annualized, from its inception in 1985 through last year, according to Courtland L. Washburn, the chief investment officer. The National Council of Real Estate Investment Fiduciaries Timberland Property Index, meanwhile, rose at an annualized rate of 15.09 percent from its inception in 1986 through the first quarter of this year, and over the last three years through the quarter it returned 14.63 percent, exceeding the 12.25 percent annualized gain of the Standard & Poors 500-stock index over the same period.

Timber is also seen as a hedge against inflation and the fluctuations of most financial securities; analysts say it has a low correlation with stocks and bonds, meaning that its returns may well be rising when securities prices are falling.

People are looking for that extra yield, said Maria Maslovsky, an analyst at the real estate finance group of Moodys Investors Service who has seen increased interest in alternative investments like timber in the last five years. It will become more mainstream over time.

Joel B. Shapiro, the chief executive of Timbervest, a TIMO based in Atlanta that manages more than 650,000 acres of timberland nationwide, agreed. He said that if there ever was a true hedge-fund investment, timberland is it.

Your investment becomes more valuable even if the investments are down, he said, because the trees themselves are growing more valuable.

But getting into timberland can be expensive, at least for the average investor. While there may be some limited partnerships with minimum investments in the six-figure range, most minimums at TIMOs, which function much the way private equity funds do, start at around $1 million and rise to as much as $10 million.

You can buy your own wood lot, but there are no economies of scale, said Richard N. Smith, a founder of Hancock Timber Resource and now the president of Forest Systems, a company in North Easton, Mass., that provides consulting and forest management services.

For the smaller investor, Mr. Smith and others say, the most affordable option is to hold stocks of companies like Weyerhaeuser, based in Federal Way, Wash. Weyerhaeuser, through its forest products division and joint ventures, owns or manages 21.5 million acres of forests in North America, Australia, New Zealand and Uruguay.

Other large publicly traded companies like International Paper and Temple-Inland have either sold or plan to sell off most of their timberland.

But there are also timber REITs from which to choose. They hold portfolios of timberland and disburse most of their profits to shareholders as dividends in exchange for favorable tax treatment. In addition, Congress is considering legislation, known as the TREE Act of 2007 (short for the Timber Revitalization and Economic Enhancement Act), that would lower the tax rates on timber properties to help the industry become more globally competitive.

The largest of the REITs is the Plum Creek Timber Company, which is based in Seattle and holds more than eight million acres of timberland across 18 states. The company started as a limited partnership and converted to a REIT structure in 1999.

Rayonier Inc., based in Jacksonville, Fla., converted to a REIT in 2004; it owns or manages 2.5 million timberland acres in the United States and New Zealand. The Potlatch Corporation, based in Spokane, Wash., switched to REIT status as of last year and has 1.5 million acres.

A fourth REIT, the Longview Fibre Company of Longview, Wash., agreed in February to be acquired by Brookfield Asset Management of Toronto in a deal valued at $2.15 billion, including assumed debt. A new nontraded REIT, though, is starting: the Wells Timberland REIT, offered by the Wells Real Estate Funds.

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