Want To Hedge Against Inflation? Buy A Forest

Angela Davis, President of Campbell Global, manages $10 billion in timberland for institutional and wealthy investors, promoting it as an alternative asset class offering a 4.4% botanical yield, inflation hedging, and portfolio diversification due to low stock market correlation, alongside environmental benefits from carbon absorption. While public timber REITs have recently underperformed (4% annual return over the last decade) due to operational inflexibility, Campbell Global aims for a 7% nominal return through active management, including strategic harvesting and carbon credit generation, positioning timberland as a stable, long-term investment despite inherent operational complexities and natural risks.

Analysis

The timberland asset class presents a dichotomy between the strategic flexibility of private management and the recent underperformance of publicly traded REITs. Campbell Global, managing $10 billion for institutional clients, targets a 7% nominal return by leveraging a baseline 4.4% botanical yield, active management to mitigate natural risks, and value-add services like carbon credit generation. A key element of its strategy is the flexibility to delay harvests during periods of low log prices, a discipline it claims is lacking in timber REITs. In contrast, publicly traded REITs like Rayonier (RYN) and PotlatchDeltic (PCH) have delivered a CITE{pathetic} 4% average annual return over the last decade, significantly lagging the broader market. This underperformance is attributed to their operational ties to mills, which incentivizes continuous harvesting even in depressed price environments. Furthermore, these REITs have significant exposure to southern yellow pine, a market currently suffering from oversupply. Despite their poor historical returns, these public vehicles trade at enterprise values of $1,800-$1,900 per acre and offer dividend yields of 4.7-4.9%, presenting a potential value proposition for investors willing to bet on a cyclical recovery in lumber prices.

Key Decisions for Investors

• Investors considering timber REITs like Rayonier and PotlatchDeltic should weigh their recent underperformance and strategic inflexibility against their current high dividend yields (4.7-4.9%) and low per-acre valuations, positioning them as potential long-term, contrarian value plays.
• A critical due diligence item for these REITs is their capital allocation and harvesting strategy; investors should seek evidence of management adopting more flexible harvest schedules that are less dependent on mill capacity to improve returns through the cycle.
• Given the asset's low correlation and inflation-hedging characteristics, a position in timberland should be viewed as a long-term portfolio diversifier rather than a source of short-term alpha, with an understanding of its sensitivity to the housing market, commodity price volatility, and idiosyncratic risks such as fires and disease.