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TIMBERLAND

Over the long-term, Timberland provides enhanced portfolio diversification with returns that have been far less volatile than most assets, therefore producing high relative risk-adjusted returns.

Timberland returns are driven primarily by the biological growth of trees, which is unaffected by the economy. This unique feature sets timberland apart from other asset classes. Consequently, timberland’s return generating process is largely independent of the factors that provide returns from equities and fixed income. As a result, the correlation of timberland returns with more traditional asset classes is not statistically different from zero.

Domain employs a well-defined, active timberland investment strategy, focused on the acquisition, management and disposition of properties, which typically meet a certain set of criteria, including:

Smaller, non-contiguous properties, generally within the 2,000 to 30,000 acre size range.
Significant biological growth and income potential.
Diversified by geography, botanical species and age to reduce risk and enhance liquidity.
Potential for value creation from an active, opportunistic and sustainable management regime.
Investments in markets with strong or growing demand.

Risk-Adjusted Returns

Over the long-term, Timberland provides enhanced portfolio diversification with returns that have been far less volatile than most assets, therefore producing relative risk-adjusted returns.

Returns for various asset classes (2004–2018)

From 2003 through 2017, the NCREIF Timberland Index, with a standard deviation of 6.4%, was substantially less volatile than the 15.8% and 19.2% experienced by the S&P and Russell 2000, respectively.

Timberland’s risk-adjusted return, as measured by the Sharpe Ratio, was 0.78, versus 0.39 for the S&P 500.

Natural Inflation Hedge

Returns aren’t the only attraction. Timberlands’ intrinsic and proven long-term ability to preserve capital by historically tracking the consumer-price index, can serve as an effective inflation hedge.

Timberland Correlation vs Inflation

Timber has been found to be positively correlated with unanticipated inflation. During periods of high inflation, as in the 1970s, timber provided a partial inflation hedge. With a correlation of 0.34 to inflation during the 1970s, timber prices tended to outpace unexpectedly high inflation. In other words, during high inflation periods, timber price increases account for a larger proportion of returns than would otherwise be true.

During periods of low inflation, such as the one we have been experiencing since the early 1980s, timberland returns are generally also correlated with inflation. From 2003 through 2017, timberland and inflation had a correlation of 0.29.

Biological growth, which provides the majority of returns in all periods, accounts for a higher proportion of total return in a low inflation environment. However, because biological growth is a physical rather than an economic process, it is unrelated to inflation.

Low Correlation

Low Correlation with Most Other Asset Classes

TIMBERLAND CORRELATION VS OTHER ASSET CLASSES

Timberland returns are driven primarily by the biological growth of trees, which is a physical process. Consequently, timberland’s return generating process is largely independent of the factors that provide returns from equities and fixed income. As a result, the correlation of timberland returns with most traditional asset classes is not statistically different from zero.

Downside Protection

Biological Growth Element Reduces Risk

Biological tree growth, which is unaffected by the economy and invariable positive, is a unique feature that sets timberland apart from other asset classes.

Biological growth has a compounding effect in both volume and value. First, biological growth provides increasing total volume of wood. Trees, on average, can be expected to grow in volume approximately 2-8% per year, depending on location. Secondly, as diameter increases, the trees become more valuable, with large diameter trees being more valuable than smaller ones.

Biological Yield Curve

Growth Sectors PreMerch
Age (years) 0 - 10
Growth Rate 12%+
Income Yield N/A
Products None
Minerals Oil, Gas, Brine, Coal, Sand, Iron Ore, etc
Other Hunting and Recreational Leases, Pine Straw, Maple Sugar, etc.
Growth Sectors Pulpwood
Age (years) 11 - 15
Growth Rate 8 - 12%+
Income Yield Moderate
Products Paper, Particle Board, Wafer Board, Diaper Fill, Chemicals
Minerals Oil, Gas, Brine, Coal, Sand, Iron Ore, etc
Other Hunting and Recreational Leases, Pine Straw, Maple Sugar, etc.
Growth Sectors Chip-N-Saw
Age (years) 16 - 22
Growth Rate 6 - 9%+
Income Yield Moderate
Products Dimensional Lumber:
1x4s, 2x4s, 4x4s, etc.
Pulpwood Products
Minerals Oil, Gas, Brine, Coal, Sand, Iron Ore, etc
Other Hunting and Recreational Leases, Pine Straw, Maple Sugar, etc.
Growth Sectors Sawtimber
Age (years) 23+
Growth Rate 3 - 6%
Income Yield High
Products Dimensional Lumber:
2x6s, 2x8s, 2x10s, 2x12s, etc.
Plywood Products
Minerals Oil, Gas, Brine, Coal, Sand, Iron Ore, etc
Other Hunting and Recreational Leases, Pine Straw, Maple Sugar, etc.
Growth Sectors Prime
Age (years) 23+
Growth Rate 3 - 4%
Income Yield High
Products Telephone Poles, Wide Boards
Minerals Oil, Gas, Brine, Coal, Sand, Iron Ore, etc
Other Hunting and Recreational Leases, Pine Straw, Maple Sugar, etc.
Biological Yield Curve
Growth Sectors PreMerchPulpwoodChip-N-SawSawtimberPrime
Age (years) 0 - 1011 - 1516 - 2223+23+
Growth Rate 12%+8 - 12%+6 - 9%+3 - 6%3 - 4%
Income Yield N/AModerateModerateHighHigh
Products NonePaper, Particle Board, Wafer Board, Diaper Fill, ChemicalsDimensional Lumber:
1x4s, 2x4s, 4x4s, etc.
Pulpwood Products
Dimensional Lumber:
2x6s, 2x8s, 2x10s, 2x12s, etc.
Plywood Products
Telephone Poles, Wide Boards
Minerals Oil, Gas, Brine, Coal, Sand, Iron Ore, etc
Other Hunting and Recreational Leases, Pine Straw, Maple Sugar, etc.