| An investment in timberland or timber REITs | | | | countries, such as China, increase their per capita |
| (Real Estate Investment Trusts) may provide a | | | | wealth, it is reasonable to expect that total wood |
| compelling opportunity at this time due to | | | | consumption among emerging economies will |
| numerous attractive characteristics, including | | | | increase and approach levels more consistent with |
| inflation protection, growth, exposure to the | | | | developed economies, such as the U.S. and Japan. |
| development in emerging economies around the | | | | Perhaps the most unique aspect of an investment |
| globe, and tax-efficient income in the case of | | | | in timberland or timber REITs is the organic |
| timber REITs. | | | | growth, literally. Regardless of recession, |
| For the past few years timberland prices in the | | | | depressed lumber prices, geopolitical turmoil, or |
| U.S. have been depressed, primarily as a result of | | | | other sources of investment risk, year after |
| the housing collapse. Secondly, there has been a | | | | year, trees grow bigger. If you buy a barrel of oil |
| glut of supply from Canada in recent years due | | | | and hold it for 5 years, you will still only have a |
| to an insect epidemic, which has forced Canadian | | | | barrel of oil. But if you buy an acre of timberland |
| timberland owners to harvest more than normal. | | | | and wait for 5 years, the combined size of all |
| Now, both of these variables have ceased to | | | | trees living on that acre will have grown |
| depress the market and timber prices have been | | | | measurably, and you will therefore have more |
| steadily appreciating, improving the outlook for | | | | timber than you originally purchased. The |
| investment in timberland and timber REITs. | | | | timberland investment grows, biologically, and this |
| New home sales in the U.S. are about as low as | | | | enhances investment returns over the long term. |
| they can possibly go, having declined by 85% | | | | Timber REITs are of particular interest due to |
| from the peak in 2006. The current level of | | | | their high levels of tax-efficient income. Timber |
| 300,000 annualized housing starts is unsustainably | | | | REITs, like other REITs, are required to pay out |
| low - it is far below the long-term production of | | | | 90% of their annual income each year, and |
| new housing units that is necessary to absorb the | | | | benefit by avoiding corporate income tax in the |
| 4 million person increase in the U.S. population that | | | | process. To an investor in timber REITs, this |
| occurs each year. This does not mean that home | | | | dividend income is frequently classified as a |
| prices have bottomed, only that starts for new | | | | long-term capital gain and is therefore taxed at |
| housing units likely have. It is unit volume, not | | | | the current rate of only 15% - much lower than |
| price-per-unit, which ultimately matters from the | | | | most investors' marginal income tax rate. This |
| perspective of an investment in timberland or | | | | makes timber REITs a great source of |
| timber REITs. Furthermore, it is expected that | | | | tax-efficient income. In recent years a handful of |
| the Canadian over-supply situation will end by | | | | timber companies have restructured and elected |
| 2011. Even in the absence of an improvement in | | | | to become timber REITs, providing investors with |
| the U.S. housing market, the decrease in supply | | | | a new way to take advantage of both the |
| from Canada will result in increased demand from | | | | attractive timberland market and the tax-favored |
| domestic timberland sources, and it is reasonable | | | | nature of the timber REIT structure. |
| to expect a substantial increase in lumber prices | | | | If executed properly, the relative success of an |
| going forward. | | | | investment in timberland or timber REITs is not |
| Over the long-term, global consumption of | | | | dependent on higher lumber prices or an |
| wood-based products is strongly correlated with | | | | improvement in the U.S. housing market. Instead, |
| two variables: population and wealth. The global | | | | a timberland presents a compelling investment |
| population is expected to increase by an additional | | | | opportunity because it entails numerous attractive |
| 1.4b people in the next 20 years, and the | | | | characteristics, including inflation protection, |
| emerging economies of the world are | | | | growth, leverage to emerging market economic |
| experiencing rapid increases in wealth and living | | | | development, tax efficiency, and substantial |
| standards. As large populations in these developing | | | | current income. |