This relationship between a tree’s biological growth and its financial value means that the negative impact of the time value of money and the risk of negative returns can be offset with a timberland investment because of the increasing timber volumes it generates through time. Likewise, timber price increases tend to have a favorable, compounding influence on the performance of a timberland investment. Furthermore, over the life of a timberland investment, timber value can be “stored on the stump,” which gives investors the latitude to realize cash returns when timber market demand and pricing dynamics are most favorable. This optionality, the capacity to determine when cash flows will be realized, is a unique and highly-prized feature of timberland investment.
Timberland investment portfolios can be structured to meet a flexible array of investment objectives. Higher cash flows can be achieved by including a greater proportion of mature timber holdings in a portfolio. If capital preservation and long-term asset appreciation are the goals, these can be achieved by acquiring younger working forests whose growth rates can be further enhanced through the application of intensive forest management practices. If an investor seeks a balance between generating intermittent cash flows and fostering long-term asset appreciation, a portfolio can be structured to include a variety of timber age classes.
In addition to these benefits, timberland returns can be improved by utilizing a range of sophisticated investment structuring and management strategies. These can include employing leverage; selling sub-sets of properties that have real estate development, conservation or recreation potential; and, even utilizing cash flows to support the issuance of asset-backed securities. In short, timberland investments can be shaped with techniques to meet a variety of goals for investors.