October 31, 2023

By Lynda Kiernan-Stone and Michelle Pelletier Marshall, Global AgInvesting Media

Timberland is rapidly gaining credibility as a prime alternative investment for gaining environmental, social, and governance (ESG) benefits for portfolios. It also offers a distinct level of portfolio diversification that generates low-volatility, risk-adjusted  returns compared to most other asset types. The NCREIF Timberland Property Index has documented how from 2006-2022, with a standard deviation of 5.7 percent, timber was significantly less volatile than the S&P 500 at 17.6 percent, or Russell 2000 at 18.6 percent.

At the same time, timber can offer an attractive hedge against spikes in inflation. As the U.S. has been facing inflationary challenges, timberland prices have tracked with a correlation of 0.93 from 2018-2022, indicating healthy returns during a difficult economic time. And likewise, during times when the opposite conditions are present, timberland’s correlation goes negative, with the completely unrelated, natural process of biological growth accounting for returns – making it a potentially win-win investment.  

As such, demand for these types of sustainable investment alternatives continues to strengthen among the pension and institutional investor space as part of their broader commitments to climate change mitigation and sustainability, and pursuit of diversification and risk mitigation. 

Based in Atlanta, Georgia, Domain Timber Advisors manages approximately $570 million as of June 30, 2023. Its value-added timberland strategy sources non-industrial, degraded, or underutilized timberland and has a track record of managing such assets and achieving both economic and environmental outcomes through property improvements and the ultimate aggregation of the acquisitions. 

In the role of director of natural resources at Domain Timber Advisors is Scott Reaves, who is responsible for leading the forest operations group by overseeing forest planning and execution along with the development, implementation, and improvement of all enterprise information systems and related processes supporting forest operations, analysis, asset valuation, and accounting. 

Rounding out Reaves’ list of responsibilities is the management of forest inventory, stand growth projection, harvest scheduling, budgeting, and special projects for the timber funds.

We wanted to gain more insight into the dynamic timber market and Domain’s strategy so we asked Reaves. Here’s what he told GAI News:

1). How did the timber market perform in the third quarter of 2023?

We saw timber price movement consistent with typical patterns observed in prior years from second to third quarter transitions. Timber Mart South reports South-wide pine stumpage prices saw a modest decrease along with hardwood and pulpwood pricing. Hardwood sawtimber’s average bucked the trend, increasing slightly. Price declines this time of year are generally cyclical in nature and brought about by drier weather across much of the U.S. South, which increases operability and more product being brought to market.

2). Based on this past quarter’s performance, what is your timber outlook for the rest of this year and the first quarter of 2024? What market factors are driving timber demand?

We expect a variety of near-term factors to keep timber and lumber prices flat or slightly down over the next three-to-six months. Factors include declining housing starts in the face of high interest rates, along with typical market cycles tied to seasonal weather patterns. Lumber pricing steadied considerably from the roller coaster ride of several months ago, and we expect prices to remain relatively stable or slightly elevated compared to historical averages, around $400-to-$500 per thousand board feet.

3). There has been an increase in timber acquisitions and divestitures from the likes of Manulife, Nuveen, Campbell Global, and others, and especially amid the backdrop of geo-economic and geopolitical uncertainty. From an insider’s-perspective, have you seen a more active market of investors exploring timber as a long-term investment option, and what do you attribute this to?

Yes. This includes interest from existing investors looking to increase their allocations and new entrants to the space interested in meeting carbon or biodiversity minded goals. Most groups continue to seek the historically low risk and stable return profile of the asset class while also paying more attention to elements like sustainability certifications in light of new ESG requirements. We believe Domain’s value-added timber strategy has been of particular interest to investors due to its differentiated approach to the asset class.

4). You speak of Domain’s differentiated approach to the timber asset class. Can you please explain that further?

Domain’s value-added approach to the timber asset class focuses on a variety of return drivers beyond just the biological growth of the trees. We focus on smaller, less institutional, and fragmented assets as purchasing targets then overlay management tactics such as non-core small tract land sales, opportunistic timber sales, and exploration of unique end uses (such as solar power generation), to help generate alpha. Ultimately, we seek to create sustainably managed, institutionally scaled timberland packages for continued management or potential sale depending on client preferences.

5). What other market trends should investors closely monitor (as it relates to timber)?

Several trends, in addition to housing, are worth monitoring. Mass timber continues to be of interest to investors, especially with its potential for consistent performance under testing standards such as those for Machine Stress Rated lumber, which may help drive demand over the next several years (SLB September 2023 Newsletter – Softwood Lumber Board). Carbon storage and sequestration also remain key drivers. Sequestration in woody biomass and wood products is a primary focus, but alternative methods are also coming online, such as underground storage of carbon beneath working forests. Biodiversity is another topic we are hearing more about with conservation and protection of important habitats at the forefront of that conversation. We believe a sustainably managed timberland portfolio can meet multiple objectives of these types in addition to providing an economic return.

6). Domain Timber Advisors recently closed on $225 million in capital commitments across its value-added timberland investment strategy. With this, what are current investments to-date? How will this funding grow the business and bring ROI to its investors?

The commitments include $150 million allocated to a separately managed account and $75 million to the Domain Timber Opportunity Fund (DTOF), which held its final close in June. Investors represent sovereign wealth funds, public and private pensions, insurance companies, and family-owned wealth management interests from the United States, Europe, and Australasia. Domain has placed 80 percent of the commitments to DTOF to-date in what we believe to be an attractive, well-diversified portfolio across the U.S. South. We believe these commitments illustrate that our differentiated approach can serve as an attractive entry point to the asset class for new and old investors in timberland.

ABOUT SCOTT REAVES

Scott Reaves is director of Forest Operations at Domain Timber Advisors, LLC, a SEC-registered investment adviser and a subsidiary of Domain Capital Group. Reaves is responsible for leading the forest operations group overseeing forest planning and execution along with the development, implementation, and improvement of all enterprise information systems and related processes supporting forest operations, analysis, asset valuation, and accounting. He also manages forest inventory, stand growth projection, harvest scheduling, budgeting, and special projects for the timber funds.

Previously Reaves held positions with Fountains Forestry in eastern Tennessee, and TwoDog Forest Inventory Software, respectively. In 2011, he joined an Atlanta-based timberland investment management organization as Forestry GIS and data manager and was later promoted to director – Forest Operations and Information Systems..

Reaves earned his Bachelor of Science degree in Forestry from Virginia Tech University. He is a member of the Society of American Foresters (SAF), is an SAF Certified Forester (CF), and is a member of the Association of Consulting Foresters (ACF).

~ Lynda Kiernan-Stone is editor in chief with GAI Media, and is managing editor and daily contributor for Global AgInvesting’s AgInvesting Weekly News and  Agtech Intel News, as well as HighQuest Group’s Unconventional Ag. She can be reached at lkiernan-stone@globalaginvesting.com.

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