Does money grow on trees? 🌲🌲🌲

Welcome to Alternate Universe!

In today’s edition:

• Does money grow on trees? 🌲🌲🌲

• Job opportunities at recently funded European startups 👇

• Data centers are sucking all our electricity ⚡

The Crux 🔴

Have you ever felt confident in a decision, only to realize later that you missed a detail that completely changed everything?

When I began exploring investment opportunities beyond my conventional stock-bond portfolio (aka fun money), I stumbled upon timberland.

I picked an ETF (keep reading to find which one) and thought I was done.

Although the investment did well, this was a classic rookie mistake.

After a couple of years, I decided to revisit the topic to gain a deeper understanding.

Rabbit hole time.

🐰🕳️⌚

What 🤔

Investing in timberland involves purchasing managed tree plantations or forests for financial gain. Investors count on the trees' predictable biological growth to increase their value, to sell the wood in the future.

The timberland asset class emerged in the US in the 1980s due to several key events.

• Forest product companies like Kimberly-Clark lost the ability to report timber harvest revenues as capital gains, prompting them to divest forest assets.

• This trend was accelerated by the early 1980s recession.

• Endowments and pension funds began purchasing these assets to stabilize and diversify their portfolios, leading to the creation of Timberland Investment Management Organizations (TIMOs) to help manage these investments.

• In 1999, Plum Creek Timber Company became the first real estate investment trust (REIT) in this sector and was later acquired by Weyerhaeuser. The REIT structure offered more favorable tax benefits.

Over the following decades, the timberland asset class expanded from a US-focused market to a global one.

So, how do you make money from timberland?

• Fluctuations and increases in the price of timber account for around 30% of the returns.

• Biological growth tends to be the main return driver across most geographies.

• Land appreciation and non-timber income such as recreational leases and mineral rights round up the stack.

Market 📊

The most developed markets are the US, Canada, New Zealand, and Australia. Central Europe, Africa, and South America are less mature.

Despite appearing to be a simple commodity, timber comes in many forms and sizes, resulting in a wide variety of value-added products. Timber can be broadly categorized in two ways:

1. Size: Straight logs over 8 inches in diameter are classified as sawtimber, while smaller logs are considered pulpwood.

2. Species: Timber is grouped into hardwoods and softwoods.

This categorization leads to a diverse range of final products. Softwoods, known for their flexibility, are well-suited for packaging solutions like cardboard. Hardwoods, on the other hand, are extensively used in furniture and flooring.

Historically, forest product owners owned both the timberland and the manufacturing assets. However, much of this has been divested. Today, most forest product companies, such as packaging and paper manufacturers, focus solely on the production of the final product, resulting in minimal vertical integration in the value chain.

This trend is most prevalent in the US and Europe, while parts of Latin America still show vertical integration. This localization nuances timberland investment.

So, what drives the timber market?

• The housing & construction market is one of the largest drivers of the timber market, with an estimated 50 to 75% of timber REIT success attributed to revenues from supplying housebuilding.

• A major tailwind for the market is the push for sustainable packaging alternatives to plastics, such as cardboard. Cardboard has a lower environmental impact, can be recycled, has lower transport costs, and is overall cheaper. The growth in e-commerce and its associated packaging needs further bolsters this trend.

• However, certain segments like newspapers are experiencing market shrinkage. Other specialty segments, such as diapers, are also facing declines due to decreasing birth rates in the Western world.

• Logging is a significant driver of deforestation, and government policies that safeguard and regulate harvesting practices greatly influence the market.

Pros 💪

• Real assets provide inflation hedging to varying degrees. The chart above shows that the NCREIF Timberland Index's five-year returns move closely with U.S. inflation, showing a strong correlation of 67.7%.

• Timberland returns have a low correlation to other asset classes, providing true diversification.

• Timberland's flexible harvest scheduling, allows investors to withhold harvesting during low prices and benefit from tree growth, enhancing long-term returns.

• Properly managed timberland assets offer a socially responsible investment.

• An attractive risk-adjusted return, surpassing equities and bonds.

Risks ⛔

• As with most real assets, investment in timberland assets is illiquid.

• Swings in lumber prices can have a big impact on returns.

• Trees are susceptible to biological risks such as pests, wildfires, and extreme weather.

Investment Implications 🤑

The retail investor has 3 pure-play timber REIT options, all US-based.

• Weyerhaeuser (symbol: WY)

• Rayonier (symbol: RYN)

• PotlatchDeltic (symbol: PCH)

Let’s take a quick look at the main metrics.

Despite its lower yield, Weyerhaeuser is the largest and oldest player among the three, with much larger acreage and diversified holdings. All three REITs have divested their paper and packaging businesses to focus on timberland.

Weyerhaeuser is the only one that still generates a significant portion of its revenue from wood products.

Interestingly, timber REITs have offered high returns with the lowest volatility, when compared to stock returns of companies further down the timber value chain and adjacent industries.

However, these timberland REITs have 2 main drawbacks.

1. They do not offer exposure to growing markets outside of the US.

2. They have a higher correlation to the general stock market than private timberland assets.

The alternative to owning timber REITs is to purchase one of the two main timber ETFs - WOOD and CUT.

This is what I did a few years ago.

A quick look at the underlying holdings reveals that the rest of the fund invests in forest product companies, such as those producing paper or packaging, rather than offering a pure-play timberland investment. Combined with a relatively high expense ratio, this suggests that investors seeking straightforward exposure might be better off owning one of the three REITs.

The final option is to invest in and manage timberland directly. This approach offers much greater flexibility but is highly illiquid and requires forestry expertise, making it out of reach for most retail investors.

The table below summarizes all the options neatly.

Dig Deeper ⛏️

• Timberland Investments - A Primer

• Timberland enters a new era

• Development and performance of timber REITs in the United States: a review and some prospects

Headhunted 🦅

Recently funded private companies need talent! Scout jobs at recently funded European startups, ahead of your competition. 💪

1. ZOE 🇬🇧 The personalized nutrition company has closed %15m to grow in the US. Various roles in UK/US (link)

2. MYNE 🇩🇪 The vacation proptech startup has closed €40m Series A. Various roles available (link)

3. Osapiens 🇩🇪 The German company has closed a massive $120m Series B to help companies navigate ESG. Hiring in biz dev, engineering, and operations (link)

4. Flo Health 🇬🇧 The female health app closed a $200m Series C round. Hiring from research scientists to PM (link)

5. DELIVERS AI 🇬🇧 - Robotics startup raised a $36m round. Hiring engineers, developers, and a business analyst in Istanbul (link)

6. Female Invest 🇬🇧 - The female-focused investment platform has closed an £8.7m Series A round. Hiring a content creator (link)

Interestingness📔 

• The greatest trader alive, Nancy Pelosi, is back at it, buying more NVIDIA (link)

• The market went ballistic this week. The culprit? The Yen carry trade. This is the simplest explanation I came across (link)

• How sneakers took a grip on investment portfolios (link)

• Data centres altogether use more electricity than most countries (link)

📚 New to investing? Grab a PDF copy of my ebook here.

As always, the financial disclaimer!

This is not investment advice. I am not a financial advisor. Make sure to conduct your thorough research before purchasing or selling financial products. Financial metrics correct at the time of publishing.