The most direct way to add timberland to your investment portfolio is to purchase the land outright. However, the cost and overhead of direct ownership of timberland is simply too onerous for most individual investors to consider. Buying stock in a timber company is the best way for the individual or institutional investor to enjoy the safety and high returns of timber without the problems inherent in buying and managing timber property directly.
One option is to buy stock in a publicly traded timber company, but these stocks typically pay dividends of around 4%. A smaller company that manages high-value tropical hardwoods, such as Panama Teak Forestry, can offer much better returns. Even though teak requires more intensive management than woods such as pine and fir, teak has a growth rate twice that of pine or fir and a value of more than twice that of those two woods. The value of Panama Teak Forestry stock has risen more than 15% annually since the company was established, exceeding our 12% annual value growth projections.
Every American "consumes" a 100-foot tree every year. Picture yourself looking through paper documents, sitting at a wooden table, in a wooden chair, in a room trimmed with wood, in a home or office that is probably framed in, well, wood. Are there alternative materials that could be used? Of course. But the use of wood around the world is increasing, not diminishing, despite the availability of alternative materials.
There is no reason, however, to picture large timber companies leveling the world´s forests with abandon. Although slash-and-burn and clear cutting still occur around the world, this practice is discouraged by progressive governments and by responsible forestry companies. Today´s forestry science is highly advanced, allowing companies to manage timber as a sustainable, ecologically sound crop. Well-managed timber companies can create jobs and provide excellent returns to investors while helping to sequester carbon and preserve the environment.
Instead of chopping down a forest and moving on, it is in the best interest of today´s timber companies to plan for the long term and to plant, maintain, and harvest trees using sustainable resource practices. In the U.S. state of Washington, for example, timber companies essentially cut and replant approximately 1/40th of their forests every year. In Panama, we can responsibly harvest 1/25th of our teak forests annually, producing almost twice the volume of wood per hectare produced by timberlands in the United States.
As a well-tended tree grows, its value as a product rises. Even if the stumpage price (the value of standing timber) remains constant over time, a tree becomes more valuable as its volume increases.
These are the characteristics of timber as an investment:
These factors affect the rate of return on a timber investment:
University studies show that timber investments have historically earned real rates of return in the 10 to 12 percent range. A leading timber index based on actual returns shows rates varying from 11 to 16 percent, depending on region. Since 1986, the major timberland property index has returned just over 16 percent annually; 40 percent of the return has been from income and 60 percent from capital appreciation. Teak timber properties have shown some of the best rates of return in the industry when managed properly. It should be noted that the majority of the value increase is from capital appreciation over time.
Depending on how the investment is structured, timber can provide a manageable cash flow. The age mix of the timber holdings largely determines the cash flow of the investment. If the timber property includes trees of different ages, the investment can provide income to investors every year. And if the market is down as harvest time approaches, the company has the option of delaying the harvest and, in essence, “storing” the timber to wait for prices to rise. In the meantime, the trees continue to grow.
An investment in Panamanian teak offers the potential for excellent returns. The worldwide demand for teak is high, and the supply of wild teak is quickly diminishing in traditional teak-producing areas such as India, Myanmar (formerly Burma), and Thailand.
The soil and climate of Panama are well-suited to teak cultivation. In addition, the Panamanian government encourages reforestation, and the tax system is quite favorable to timber investors.
In each plot of one hectare (about 2.4 acres), Panama Teak Forestry plants approximately 1100 teak trees. At about 4 years, our forestry engineers identify the weaker trees, and the stand is thinned to about 900 trees per hectare. At 7 to 8 years, the trees are thinned to about 700 to 800 per hectare, depending on the stand. At about 12 years, they are thinned to about 400 to 500 trees per hectare, and at 18 years, they are thinned to about 200 to 240 trees per hectare. Final harvest is ready in about 25 years. If market conditions are not optimal for selling the mature teak in year 25, management may choose to allow the timber to continue growing, waiting for the most profitable time to sell.
Some of our competitors factor in profits from the sale of year 7/8 thinnings; however, since the value of these thinnings is disputed, we do not include any income from the sale of year 7/8 thinnings in calculating our return on investment. The 12-year thinning will yield about $2,000 per hectare based on today´s price of teak. The 18-year thinning will yield a net profit of about $4,000 per hectare based on today´s teak prices. At 25 years, the remaining trees will produce a harvest with a net profit of about $110,000 per hectare based on today´s teak lumber prices, this assumes that there is an operating mill to do basic processing for the logs. This is based an annual yield rate of 10 cubic meters per hectare.
In inflationary times, both the price of teak and the value of the land will appreciate, providing additional protection for the investor´s return on investment (ROI). Dividends will be paid out as Panama Teak Forestry´s stands of timber reach maturity and are harvested. We assume a reasonable 3% increase in the value of teak over time.
The ideal investment is one that provides an excellent ROI but is also environmentally beneficial. Panama Teak Forestry offers an ecologically sound investment. Its well-managed tropical timber properties bind carbon dioxide, which helps reverse the damage from carbon dioxide pollution. By practicing responsible reforestation, we are helping to meet the world´s demand for commercial hardwoods while aiding in the preservation of native tropical forests.
For more information about timber investments, see the articles listed below. Keep in mind that teak, one of the highest value commercial timbers available, grows faster than the types of timber described in these articles and therefore provides an even better ROI.
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