From the desk:Timberland / Vineyards / Orchards

Total return is 9 percent on 160 acres of fir. Cash yield is zero.

Sold a duplex last year and I've been sitting on the proceeds looking for the boring thing that holds up. Timberland keeps coming up because of the return profile everyone cites, roughly 10.7 percent annualized since 1987 on the NCREIF index with a standard deviation around 6.9 against nearly 16 for the S&P. That's the pitch and I get why it works on paper.

The tract in front of me: 160 acres, coastal-influence fir type, roughly 130 acres in a single even-aged stand planted about 28 years ago, the rest in a stream buffer and a rock pit. Asking 685k, so 4,280 an acre all in. Forester's letter puts standing volume around 34 MBF per acre on the productive ground with a projected final harvest window at age 45 to 50.

Here's my problem. Between now and roughly year 45 this tract produces one commercial thin (maybe year 33, maybe 900 an acre net) and then nothing until the final cut. Meanwhile I pay about 2,600 a year in taxes and 1,100 for road maintenance in a shared road agreement.

So the 10.7 percent is real in the sense that the trees are growing and the standing inventory is worth more every year. It's not real in the sense of anything landing in my account. It's a 17 year negative carry and then a very large check, and the whole return depends on the price of logs in a single year I can't forecast.

What I can't decide is whether "biological growth is return" is a genuine answer to that or a way of describing an illiquid asset in flattering terms. Everything I own currently pays monthly. This pays once, in 2042 or whenever I decide.

Is there a way to structure a single-tract position so it actually behaves like the index, or is the index just describing a portfolio of tracts at different ages and I'm looking at a completely different risk?

Answer

0jessreyes12AU1APRO8

You've described the actual mechanism correctly and then talked yourself out of trusting it, so let me put the pieces where I think they go.

A single even-aged stand is a bond that pays once at maturity, and you get to pick the maturity date within a window of maybe a decade. That optionality is the thing being sold. If logs are cheap in 2042 you wait until 2046 and the volume keeps accumulating while you wait, so you're not forced to sell into a bad market the way you would be with a lease expiration. Deferral costs you the tax bill and the time value, and it buys you price. That's genuinely different from most illiquid assets, where waiting just costs you.

What it's not is income. Anyone telling you a single-age tract produces yield is describing a portfolio, and you'd be one tract.

So the structural answer to your actual question: a single tract behaves like the index only if you convert it into multiple age classes, which means either buying more ground over time or harvesting in blocks rather than all at once. On 130 productive acres you could plan a staggered final harvest, say 40 acres at 45, 45 acres at 50, the rest at 55, and replant behind each. That gives you a check roughly every five years forever instead of one enormous one. You give up a little efficiency on mobilization and road cost because you're bringing a crew in three times, call it 4 to 8 percent of gross across the three entries.

The assumption that decides it is whether you'll actually still own this in 25 years. Block harvesting only pays if you're building a perpetual thing. If your real horizon is one cycle and an exit, the single cut is cleaner and you should underwrite it as an illiquid single-date bet and size it accordingly.

16 replies

1aliyah_bAU2APRO6

Your carry is 3,700 a year on 685k. That's 0.54 percent, which is nothing compared to what I pay to hold anything with a building on it. I'd stop calling it a negative carry problem and start calling it an opportunity cost problem, because the money is the 685k sitting there for 17 years, not the taxes.

1chriswalton8CC1CPRO8

The index is a portfolio of institutional properties, most of them large, most of them with a distribution of age classes so something is cutting every year. That's exactly why the reported volatility is low. You're comparing one even-aged stand to a smoothed aggregate of hundreds of them. Your realized return will have a completely different shape even if the average is similar.

1jordan_ellis2ActivePRO6

Naive question from the sidelines: could you buy two smaller tracts at different ages instead of one at 685k?

1bmoreno23AB1B

@pike that was my first thought too, and then I ran the numbers on transaction costs for two 80 acre buys versus one 160 and it's not free. Surveys, title, two sets of closing costs, two road agreements to read. The diversification is real but you pay for it up front.

1brandonlee36Passive

The road agreement is the line I'd read three times. Shared road, 1,100 a year now, and what happens when a log truck cycle tears it up? Some of those agreements allocate haul damage to the hauling party and some just split everything pro rata by acreage. That's a five figure question at harvest.

3ehernandez74PO2BPRO5

I looked at something similar two years ago and didn't buy, and the reason was that I couldn't answer who cuts it if I die in year 12. My kids don't know a fir from a fence post. If you go forward, the succession piece is more work than the purchase.

1gregpowell66AG4BPRO8

34 MBF per acre at 28 years sounds high to me for that type unless the site index is excellent. Ask what site class the forester used and whether that volume is a cruise or a model projection. Big difference.

1kevin_lombardPG1BPRO5

What does MBF mean? I've read this thread twice and I still had to look it up (thousand board feet, for anyone else).

0nicole_adeyemiPassivePRO5

The buffer acreage matters more than the 30 acres suggests. Stream buffers usually carry harvest restrictions written into state forest practice rules, and those rules differ state by state and get revised. Find out what the current buffer width requirement is where this sits and whether your 130 productive acres was calculated under today's rule or the rule in place when the stand was planted. If the buffer widened, some of your merchantable ground isn't merchantable.

-1priya_n21PO1C

This is the exact asset I keep deciding against. I want a check every month and this is a check every seventeen years with a weather risk attached. No judgment, it's just a different appetite.

2aaron_fitz10 Get yoursPRO6

@compass the block harvest idea reframed the whole thing for me and I'm not even the one buying. Turning one maturity into three is the part I hadn't considered.

1tashaford30PB2APRO7

Ask about fire insurance availability before you get attached. Some tracts in some regions are effectively uninsurable now and the premium quote is a market signal on its own.

1karen_whitfieldPG4APRO7

I hold land on a 20 year view and I'll say the plain version: 4,280 an acre for stocked fir ground with a road, held for a generation, is a normal thing to do and it's rarely the trade you regret. What people regret is buying it with money they need back on a schedule. @verity your duplex proceeds either have a job in the next five years or they don't. That's the whole question and it's about you, not the tract.

1renee_dubois Get yours

Coming from small multifamily, the thing that strikes me is how much less there is to break. My units teach me something expensive every month. A stand of trees teaches you once a decade. There's a real value in that I hadn't priced before reading this.

-1mitchell_ray4 Get yoursPRO6

Whatever you decide, walk the whole property line before closing. I've seen enough fence lines that didn't match the survey to know it's worth the day.