Since its construction in 1940, Lake Greenwood has become a valuable asset of the local community as well as for the entire Upstate of South Carolina. This 11,400 acre lake, which is the main water source for Greenwood and much of Greenwood County, also serves as a hub for a number of recreational pursuits which have fostered significant population and economic growth in this region. History has revealed that both positive impacts and challenges result from increased levels of population and economic activity in a given area – and the Lake Greenwood community is no exception to this rule.

According to the Saluda-Reedy Watershed Consortium (SRWC), “a broad based coalition of universities, non-profit organizations, government agencies and private businesses which have conducted a wide range of research on Lake Greenwood and its watershed”, several obstacles concerning water quality must be overcome in order to ensure the future health of Lake Greenwood. The 745,600 acre Saluda-Reedy Watershed (SRW) and Lake Greenwood have a long history of dealing with unwanted effluents. For decades the Saluda River and the Reedy River carried away many types of wastes from growing industry and development in the Upstate. The implementation of regulations on unwanted industrial effluents such as the Clean Water Act of 1972 made a major impact on the current water quality of the SRW and Lake Greenwood. However, Lake Greenwood and the SRW currently face new health threats – the SRWC has identified sediment from upstream development, stormwater runoff, and phosphorus from wastewater discharges as the main causes that affect the cleanliness and levels of water in Lake Greenwood.

A study by the SRWC reports that 307 acres of Lake Greenwood has been lost to sedimentation in the upper part of the lake. If this process continues there is the potential for negative impacts such as the loss of waterfront land, harmful pollutants, and decreased boat and recreational access. Major algae bloom, which Lake Greenwood experienced in 1999, is another real threat…

“[w]hen an overload of phosphorus and nitrogen are introduced to the lake, algae growth can increase to an uncontrollable level. As the algae dies and sinks to the bottom, the decay process consumes a substantial amount of dissolved oxygen. A combination of low bottom-water oxygen levels and high surface water temperatures that often occur in the summer can leave many fish and other aquatic life with little or no suitable habitat.”

Land use along the shore of Lake Greenwood is another critical aspect of the water quality. Some lakeside development produces soil erosion, loss of shoreline vegetation, and toxic runoff which contribute to poor water quality.

This research makes a strong argument that the health of Lake Greenwood is in jeopardy. Growth and development in upstate South Carolina have once again reached a level that is causing detrimental impacts to Lake Greenwood. However, these findings also shed light on the implementation of proven methods that helped Lake Greenwood overcome water quality problems forty years ago. Although government regulations and policies like the ones implemented in the past are part of the solution, they are not the only effective measures to help improve the water quality. Conservation easements on properties within the Saluda-Reedy Watershed can have a major impact in the effort to improve Lake Greenwood’s water quality. These properties consist of those with Saluda & Reedy River frontage as well as lake front parcels and the preservation of land within this watershed will have a direct effect on reducing the amount of pollution that enters Lake Greenwood.

In addition to qualifying for conservation easements, large acreage tracts with significant frontage on Lake Greenwood are unique pieces of real estate with regards to the current real estate market. Unlike large timber and recreational tracts in this area, a strong demand for lake lots is in place resulting in stable values throughout the economic downturn. This market indicator reveals that undeveloped lake frontage has good investment potential from a lake lot development perspective. A savvy investor should recognize the enhanced investment potential of a large acreage tract with significant frontage on Lake Greenwood. A property with these features offers significant tax benefits through a conservation easement on designated areas as well as mitigation opportunities for sustainable lake lot development. In addition, the stark contrast of the current market for lake lots and large acreage recreational and timber tracts allows an investor to assess the value of a large acreage tract with significant lake frontage from two separate vantage points which is advantageous.

Lake Greenwood is a treasured resource of Upstate South Carolina and for the last seventy years this lake has contributed to the economic growth of the area while also facing water quality challenges. This constant struggle is a familiar story for waterways and wetlands across the southeast and the decision to sacrifice clean water for financial returns and vice versa is never easy. Fortunately, in some circumstances the two are not mutually exclusive. Sustainable development, if implemented properly, can facilitate the co-existence of clean water and financial returns given certain market trends and property location. These conditions currently apply to large acreage tracts with significant undeveloped lake frontage on Lake Greenwood resulting in a rare opportunity to assist in the protection of Lake Greenwood with a positive return on investment.

Photo courtesy of Green Hill Land and Timber - ghland.com

How many researchers does it take to change a light bulb? Actually, it just takes one, but you’ll have seven others standing around debating about the correct methodology. And that brings us to a challenge with investment data and research:  if we think a data set or analysis “should” exist, it often doesn’t. And if it does exist, it’s probably out of data (especially in forestry). Therefore, my team at Forisk views the systematic aggregation, tracking and analysis of facts related to timberland markets and wood bioenergy as fundamental to forestry investment research.

That said, what’s going on out there?

US Timberland Ownership Led by Private Firms

Part of Forisk’s timberland investment research focuses on how private timberland ownership changes over time. Estimates of the “investable universe” of timberland in the US range from 60 to 100 million acres; we count approximately 210 owners that each own and manage 25,000 acres or more for a total of ~82 million acres. Of these acres, 20% are owned by the four public timber REITs (Plum Creek, Potlatch, Rayonier and Weyerhaeuser) and 37% are managed by 27 US-based timberland investment management organizations (TIMOs). The 43% of acres associated with “other private” owners include forest industry firms, private individual and families, conservation groups and other non-forest industry firms and institutions.

The top 300 timberland owners and managers in the US account for nearly 84 million acres of private timberlands in the North, South, and West. The top 10 alone account for 32.5 million acres. Detailed analysis of these ownership groups highlight the continued shifting of acres to institutions, and the increased activity by private individuals and “family offices” in timberland markets.

Bioenergy Projects Looking for “Solid Ground”

The wood bioenergy sector in the United States continues its extended round of musical chairs. As of January 30, 2012, Wood Bioenergy US reports that projected wood demand for all announced projects in the U.S. dropped 7.4 million tons year-to-date, a 6% decrease since December 2011. This is largely attributed to the removal of several large biomass co-fire projects from the Wood Bioenergy US database, particularly in Ohio. Utilities claim that biomass remains uncompetitive with other alternative compliance options (note: natural gas). Also, some coal units are scheduled to shut down to meet EPA MACT requirements.

In liquid fuels news, the USDA granted ZeaChem a conditional commitment for a $232.5 million loan guarantee from the 9003 Biorefinery Assistance Program. The loan guarantee could help fund a 25 million gallon/year commercial biorefinery. ZeaChem plans to build the commercial biorefinery at the same site as its demonstration plant in Boardman, OR. Elsewhere, LanzaTech purchased the former Range Fuels site in Soperton, GA for $5.1 million in a foreclosure auction. The company plans to use wood residues to produce fuels and chemicals.

Enviva’s first shipment of pellets left from the Port of Chesapeake on December 31. The vessel, bound for Europe, contained 28,000 metric tons of wood pellets. Enviva began operations at the Ahoskie pellet plant in November. Two additional plants are in the planning stages in North Carolina and Virginia; both will also use the same port.

Meanwhile, demand for wood from traditional forest industry users has remained flat as manufacturers look to better housing news in 2012 and 2013. Also, the pulp and paper industry continues to enjoy strong markets and productivity.

Demand for Timberland Remains Strong

One fact continues to percolate up during our ongoing timberland market research: demand for timberland assets remains strong from institutional investors and forest industry firms. After decades of timberland divestitures, forest industry firms are reevaluating the options associated with acquiring timberlands to support raw material needs and to address the question “what’s the best use of our investment capital in 2012?”

Early in my investing career, I bought shares of Crown Pacific Partners, a timberland-owning firm headquartered in Portland, Oregon. During market declines in the late 1990s, the firm subsidized its shareholder distributions through borrowing and cash generated from non-organic business activities. In other words, the firm ate its seed corn. Crown Pacific filed for bankruptcy in 2003.

My shareholding experience with Crown Pacific influences my research to this day; it provided valuable lessons on the available (and unavailable) levers for cash generation and risk mitigation with timberland investment vehicles. At the end of the day, timberland owning firms – such as public REITs Plum Creek (PCL), Potlatch (PCH), Rayonier (RYN) and Weyerhaeuser (WY) – must embrace situations imposed by external markets and optimize firm performance for shareholders. How did timber REITs fare in 2011?

Big Decision in Tough Markets

Potlatch leadership dug deep in late 2011 to make the sector’s “stone cold decision of the year” to reduce dividends and harvest levels. These decisions by the PCH Board and senior management (1) placed long-term asset values and maximization over short-term yields and (2) embraced the realities of knowable, quantifiable impacts on wood markets relative to speculative forecasts of key demand drivers. Cheers.

Equity markets embraced the resulting 39% reduction in Potlatch’s yield. While share volume spiked on the day of the announcement, PCH’s share price declined 2.2% after two days of “post announcement” trading. This left its dividend yield at 4.1%, in line with the other public timberland-owning REITs. According to the FTR Index, the timber REIT sector now has a 4.0% dividend yield.

Timber REITs and Timberlands Outperform US Treasuries Long-Term

U.S. Treasuries remain a common benchmark for private timberland investments. Why? Relative safety and low risk over long time frames. However, U.S. Treasuries, thanks to a robust secondary market, are more liquid than private timberlands, making them convenient benchmarks for publicly-traded timber REITs, as well.

We also care about Treasury yields because when they increase, so do interest rates on fixed-rate mortgages. This increases the cost of buying homes and decreases the demand, and prices, of those homes, which can slow the economy. This coincides with another reason why timberland investors take such a strong interest in Treasuries:  they affect the costs of building and buying homes, which influence the supply and demand of forest products such as lumber, OSB and plywood.

On an annualized basis and year-to-date, how have timberland investment yields benchmarked to 10-year US Treasuries? For the ten year period from 2001 through 2010, both private (less liquid timberlands) and public (more volatile timber REIT stocks) investment vehicles outperformed US Treasuries: timber REITs returned 6.65% annually, private timberlands according to NCREIF returned 6.82% per year, and US 10-year Treasuries returned 3.99% per year on average.

Conclusion: Timber REIT Kudos for 2011

In 2011, timberland-owning REITs, as a sector and led by Rayonier’s 27% gain, outperformed the S&P 500. As measured by the Forisk Timber REIT (FTR) Index, publicly-traded timber REITs returned 5.69% versus 0.00% for the S&P. The FTR Total Returns Index, which accounts for dividend distributions, earned 9.62% in 2011.

With the recent run-up in row-crop farmland prices, savvy investors should be looking to similar investments that offer many of the same benefits of crop land ownership, without the hefty price tag. Timberland is just such an asset. In fact, timber is a crop. It just has a much longer production cycle. And here’s a secret…when you look at the asset classes held by the ultra-wealthy, almost without fail, you will see a heavy timberland flavor. Institutional investors, and high net worth individuals have already begun to take advantage of this opportunity. If you have not recognized this opportunity until now, it’s time to educate yourself on the benefits of timberland ownership.

Now I’ve mentioned the wealthy a couple of times here, but that does not mean you need 10 million dollars socked away to buy into a timberland asset. Those wealthy individuals had to start somewhere, and for the most part, they did not start out with millions to invest either. They started by making smart investments in assets that appreciated in value, or brought them income in some manner. Timberland will do both. It will work for the guy that can buy 40 acres, just like it will work for the investment group that owns 400 thousand acres. YOU have to start somewhere. As investors begin to substitute away from the higher priced good (Crop Land), the substitute good (Timberland) will appreciate in value. There’s no magic formula or fuzzy math here, it’s straightforward, basic level economics. When the value of a good goes up, so does the value of substitute goods. Timberland is a good substitute for crop land.

Why Timberland and Why Now?

Real Estate is a tale of two markets right now. Everyone knows that the larger real estate market, like our total economy, is not doing well. However, farmland seems to be breaking new record highs on an almost daily basis. Many factors contribute to that. Some of it is scarcity, some of it is commodity prices, some of it is advancement in the productive capacity of good farmland, some of it is capital from non-farm sources flowing into the ag land economy, and some of it is pure speculation.

Let’s focus on the last two, as these are the factors that are driving prices the most in the current market. Speculation. There’s a bad word, isn’t it? I beg to differ. Speculation brings liquidity to markets the world over. Unless you can predict the future 100% correct all the time, every decision you make is a speculative one. Without this speculation many of our markets would swing more wildly than they already do. Speculation will help put a bottom sagging markets. Speculation in the commodities markets helps farmers plan their crops, and protect their investments. Speculation has a purpose in a free-market economy. Speculation can propagate itself to unsustainable levels, as we have witnessed in so many “bubbles” in the last decade. Speculation that is based on provable numbers, and time-tested data is a better bet than speculation in a market because everyone else is doing it. The cropland market has a fair amount of speculative value built into it right now. Yesterday is when you should have invested it cropland. If you are going to profit from the appreciation in an asset based on the forward momentum of speculation, the time to do that is before it’s all the rage. Timberland is positioned well to take advantage of this right now. As the cropland numbers push higher, more people will see the value in substituting timberland for cropland. More people will grow uneasy with the run-up in cropland values and substitute away from it. Get into timberland now, and benefit from this economic law.

There’s also much more capital in the agricultural economy today than is traditionally present. People that would not know which end of a cow to feed, or that peanuts grow in the ground now are owners of farmland. Many of these people have invested in the land factor of production because they are substituting away from investments in the stock market that they have deemed more risky. They simply hold the property for the rental income, appreciation, and hedging ability of the asset. They rely on a traditional farmer to actually produce from the land. Until recently, this was a very uneasy partnership between the big money, city-slicker and the farmer. With the maturation of our ag markets, and the sheer volume of capital available from urban investors, they have grown to appreciate each other a bit more than in the past. Many of these same dynamics are at play in the timberland market. More investors are realizing the income, appreciation, and hedging properties of the timberland investment. This market will soon develop in much the same fashion as the cropland market has in the past couple of years. Plus timberland can be more easily managed by someone who has not been a farmer all of their life, or even someone who lives in a downtown loft apartment. It’s a bit more forgiving to the newbie than is cropland and you have the opportunity to time your harvest to highs in the wood fiber markets instead of taking the going price at the end of the growing season. This puts the investor in the position of profiting from the production aspect of timberland…not just sitting back and collecting rents from someone else trying to work out a profit using the land too.

Why is Timberland a Good Investment Substitute for Cropland?

Timberland has all of the qualities that today’s investors are paying premiums to obtain in the cropland market (income, appreciation, hedging). Timberland has a lower capital requirement per unit of production than cropland. Timberland has not experienced the recent run-up in prices that cropland has. Timberland can be more easily managed, in a hands-on manner, by the novice than can cropland. You can do all of this with timberland and still obtain rents on the timberland from outdoorsmen who wish to hunt on the property…while you are growing your timber crop. The numbers you need to make speculative investment decisions are available, proven, and time-tested. No fuzzy math. Just good solid investment sense. Get yours before it’s all the rage. Then profit from a timberland investment once everybody’s doing it. Get ahead of the curve instead of behind it. Buy Low. Sell High.

Recent comments by Federal Deposit Insurance Corporation (FDIC) Chairman Sheila Blair regarding minimum down-payments of up to 20% for “qualified residential mortgages” (QRM) echoed discussions about residential housing markets at the UGA Timberland Investment Conference. Our Equity Research Team (Neena Mishra, CFA, Director of Equity Research; Dr. Tim Sydor, Forest Economist; and Dr. Brooks Mendell) met to discuss potential issues and implications from this on housing and stumpage (timber) markets:

According to National Association of Homebuilders (NAHB) Chairman Bob Nielsen, the plan would disqualify a number of potential home buyers, reducing home sales and resulting in 50,000 fewer housing starts per year. Changes in mortgage requirements affect housing starts, which in turn affect the forest products industry.

How might this affect timberland investors?  Using Forisk’s interactive Stumpage Forecasting models, we applied NAHB’s numbers. The net impact of fewer home  built reduces softwood lumber consumption by 1.5 to 1.9 billion board feet per year which could lower softwood sawtimber stumpage prices in the US South by $0.60-0.80 per ton based on direct effects alone. This does not include potential impacts on the shadow inventory of unsold homes and potential foreclosures in the pipeline.

In addition to affecting timber markets, the FDIC/Federal Reserve plan represents a significant shift in risk. From one perspective, any probability of default whether due to job loss or equity loss (so-called “strategic default”) is borne by the buyer in the form of the 20% down-payment. As written the requirement is indiscriminate, even including buyers with high FICO scores. Would rates actually decline as a result?

Requiring lenders to have “some skin in the game” is necessary but risk retention increases the cost of credit. Thus a line must be drawn to determine which loans are less risky and the less risky loans should carry lower rates of interest (possible only if no/very low risk retention by the banks). There is no doubt that QRM loans will carry a much better rate of interest, if the rules are imposed. Overall rates may or may not come down but QRM loans would clearly carry much better rates than non-QRM loans.

The picture is further clouded by the fact that the private securitization market for housing is gasping; securitization brings down the cost of credit and increases the availability of credit. Reviving the private securitization market would be difficult if very strict risk retention requirements are imposed. This is further exacerbated because current rules exempt FHA, Freddie Mac and Fannie Mae loans (while Freddie and Fannie remain in conservatorship) from any risk retention requirement. Currently about 90% of the loans are backed by these agencies, so the actual impact on the housing markets may not be that great. As such, the rules actually favor Freddie-Fannie, making their exit – an oft cited objective of reforming the mortgage markets and reducing tax-payer exposure – from the housing markets anytime soon nearly impossible.

The “80/20 rule” – also called the “Pareto principle” for Italian economist Vilfredo Pareto – posits that approximately 80% of your results or effects derive from 20% of the causes. Look around and examples materialize. 80% of your revenue comes from 20% of your clients. 20% of your job will take up 80% of your time. 80% of the time your newborn cries at night occurs due to 20% of the potential reasons. Pareto made the original observation in 1906 when he noticed that 20% of Italy’s population owned 80% of the land.

This management rule of thumb provides a means for quickly assessing profitability, risk, control and capacity in a business or an industry (which helps prioritize work). In the forest products and timber industries, we see examples of this rule in our research associated with timberland ownership, end product market share, and factors driving prices, especially at the local level.  However, nationally, industries may reflect more or less concentration. Let’s consider the use of wood in the United States.

In 2005, Forisk Consulting began collecting mill-specific wood demand and capacity data in the United States. Today, our team manages an ongoing research program that collects and confirms data on 3,196 announced and operating wood-using forest industry and wood bioenergy mills throughout the US. [One product that we provide to clients from this research is a mill database that supports shapefiles for analyzing wood baskets and timberland investments, and making maps for spatial analysis.]

In a given year in the US, approximately 2,300 forest industry firms consume ~500 million green tons of wood. Which firms use the most? The accompanying table includes the top 10 US companies based on potential wood use. The list includes wood use at full capacity for mills labeled as open in our database as of July 2011. Full capacity for the industry currently sits just short of 600 million green tons.

The top 10 comprise ~241 million tons per year of capacity (actual wood use represents 70-90% of this, depending on products produced and time period). The top 10, which represent less than 1% of the firms, account for ~40% of the wood using capacity. The top 10% of the firms (~230 firms), account for ~85% of the wood using capacity in the US forest products industry.

The amount of press farmland has received in the last year could fill a few bookshelves. It is amazing that a real estate category that typically turns over at rate of about 3% which is now turning at half that has so much exposure and analysis. So what about all the other land? Recreational land, building land, vacant lots, or any other rural land? What is happening in that market? There seems to be no press and buyers are thrilled.

If you are in the market for land for recreational use or as a building site then now is the time to search. Farmland that may have been split up and converted to transitional development land is a good start. Prices are usually reasonable and tend to mirror more of the residential market values. Interestingly, farmland has historically and is also now the case, not run concurrent with residential market values. The run-ups in values have usually occurred when other sectors are doing poorly so take advantage of market conditions and prices.

If you are looking for a relatively small plot of land; say about 20 acres or less, then a great place to start looking is LOTFLIP.  It is easier to find what you are looking for when the search parameters are already filtered for you.

If you have a specific area and have narrowed down your requirements and still cannot find anything suitable then search all land listings in the area. If you find a larger tract and only want a portion then contact the agent and make an offer for a split. Many times if you are willing to pay for the survey on the split portion or share in the split costs then a seller is more open to the possibility. Sometimes they will say no immediately and adamantly state they are not going to split the land.  In that case, go ahead and leave your name and number as often times after they think about it they will re-consider.

Other options include finding two or three small lots (1 to 2 acres) and trying to buy simultaneously so that you have a larger piece. In many failed rural subdivisions this is usually fairly easy to do because you can contact the Homeowners Association (HOA) and ask if anyone is interested in selling their lots. Every time we have listed lots in rural subdivisions almost immediately the adjoining sellers will contact us and let us know they are interested in selling too. However, make sure you find out all the rules and regulations of the HOA in advance because if they continue to charge fees on a per lot basis instead of your one continuous parcel it could be costly. Many HOA subdivisions will work with buyers and may even change rules if necessary because they want the land sold to a buyer that will maintain the land.

Whatever you are looking for in a land parcel be sure to do your homework. Some sage advice from Jonathon Goode in his recent article, Why Hire a Land Agent when Dealing with a Neighbor and many other articles on LandThink are good resources.

Economic uncertainty and turmoil around the world is leaving investors looking for a “safe” place to invest money. There are as many different investment strategies as there are investment gurus touting the safest place to invest your money in this economy. But what really constitutes a “safe investment” these days?

Currently in most of the major cities across our nation, people are gathered in parks and banding together to “Occupy” and protest. What they are protesting, even they aren’t in agreement on. But they are bent on shutting down Wall Street, burning trash in the streets, and vandalizing businesses. All while 90% of Americans are able to get up and go to work every day. Imagine if things got really bad. Just look at the protests in Greece or France right now that are sparked by their economic woes. So far our protests are reminiscent of those from the 1960’s. But what if our economy deteriorates, and the protests become like those of the 1860’s?

In my mind the definition of a “safe investment” has changed somewhat over the past year. As a land agent I believe land is inherently a good place to invest money; one that has historically shown appreciation in value. And I believe rural land, if purchased at the right price, is still a great investment to make. But it is the word “safe” that I have placed more weight on in recent months. Here is why I personally believe land is the safest investment the average person with some means can make now.

Land is Permanent

When you purchase land, you can rest assured that your investment will be in the same place every day. It is not going anywhere, because it is fixed. I read in a May 2010, New York Times article that up to 75% of trades made on the NYSE are done electronically, taking place in millionths of a second.  These are computer-generated transactions with no human involvement other than inputting what should signal a trade. This scares me to think that so much of our nation’s wealth depends on this imperfect system to work perfectly. All of that money is simply floating around in the air. Not so with land. It is a certainty that if the sun comes up tomorrow, your land will be there too.

Land is Useful

Stocks, bonds, and gold have all been solid investments at times, however In periods of uncertainty, people should put their money into an asset that not only has potential to appreciate in value, but is also useful. Rural land is the safest investment to me because if things get really bad in our country it may be necessary to grow your own food, fuel your own home, and provide your own water for some period of time. You simply cannot do this in a studio apartment in a major city. In this survival scenario, owning a property than can sustain livestock, support some agriculture, and provide fuel in the form of wood or gas will be more important than having gold bars and stock certificates in your safe deposit box. If you don’t own land, you’ll be looking for someone you know who does.

Land is a Buffer

People are great. Crowds are crazy. Mobs are madness. People in close confines meld into mobs that lose all reason in a hurry. Just last week we witnessed the riots at Penn State by students that were incensed at the firing of Joe Paterno. Their support for the coach degenerated into flipping a van and setting fires in a matter of minutes. In 2009, in my small town of Marion, Alabama I witnessed about 200 people assailing the police station in protest of a person being arrested. State troopers, sheriffs’ deputies and officers from surrounding counties rushed to the scene to disperse the crowd and restore order. I have seen officers with automatic weapons on the street corners in my town. Owning acreage is a great way to put a buffer between you and the potential madness that economic distress causes. Having a defensible space will be important in that scenario.

I am not normally prone to be a conspiracy theorist or one to cry it’s the end of the world. But I look around at what is happening in Europe and see that it could happen here. Greece is going under because of a little over $50 billion in debt. The US owes more than $14 trillion. The Federal Reserve Bank is leveraged 53 to 1. If a client came to me saying they wanted to finance land with only 2% down, I would say “good luck”. Our country is there right now. The Discovery Channel recently aired “What’s America Worth?” hosted by Donald Trump. The premise of the show was Trump stating the dollar value of residences, infrastructure, agricultural assets, etc… The most telling statement Mr. Trump made was that he valued all of the residences in our nation at $16 trillion. I instantly connected the fact that Americans would need to sell nearly every private residence in the nation to cover our national debt! That is staggering and scary.

The takeaway from this article is that land is the safest place to put your money. Not merely to protect your money, but to protect you and your loved ones. This investment strategy is not limited to the super rich. Smart investors like George Sorros and Ted Turner are way ahead of me on this. This advice is aimed at the person that can scrape together at least $10,000 for a down payment and can make monthly payments of $500. In many areas, you can find a property that will sustain a family for that price. I have looked at purchasing two properties personally for my family in that range this month. I wasn’t able to negotiate a deal with either seller, but I am looking for something just like what I am writing about.

Land is the safest place to invest. If times get tough land will be a life-saver. Someone is going to own it, will it be you?

Last week, the Wall Street Journal reported on the rush of investors buying into publicly-traded real estate investment trusts (“Real-estate investors target neighborhood that is looking up,” Wall Street Journal, 11/15/11). According to Citigroup Global Markets, investors, year-to-date, invested 18% more capital into publicly-traded REITs than in all of 2010, and 400% more than in 2009. Holy groupthink, Batman!

This stampeding herd of buyers returning to public real estate markets reminds me of the African proverb “you can’t run and scratch your foot at the same time.” As a reluctant runner, I welcome an excuse to pause and scratch a puzzling itch or three. First, why the interest in REITs generally? Second, how does this look within the context of the overall market? Third, how do timberland-owning REITs score during this investment cycle?

REIT investments satisfy the hunt for yields. With capital looking for “relative” safety and valuing a return to fundamentals, public REITs attract investors eyeballing the steady cash flows and requirement to distribute earnings quarterly. Within the REIT sector, certain sub-sectors have outperformed the broader REIT market. According to NAREIT, total 2011 returns on apartment buildings and self-storage properties averaged ~10% and ~22%, respectively, through the first week of November. Nice.

However, a closer look at the numbers indicates the article made a mountain out of a molehill. Overall, REITs appear to be tracking the market.  REITs YTD through November 18^th returned -2.25% versus -3.34% for the S&P 500 versus….-2.69% for public timber REITs according to the Forisk Timber REIT (FTR) Index. While real estate often satisfies objectives to diversify portfolios, this has proven more difficult in the context of a European debt crisis, failing efforts to balance U.S. budgets, and lagging demand for homes and construction.

What about timberland investments? Year-to-day through Q3, according to NCREIF, equity investments in timberlands returned 1.06% and -0.35% in the third quarter. For reference, with dividends included, public timber REITs as measured by the FTR Total Returns Index generated 0.63%.

The FTR Index includes Plum Creek (PCL), Rayonier (RYN), Potlatch (PCH) and Weyerhaeuser (WY). As of 11/18/11, publicly-traded timber REITs comprise 4.99% of total public REIT capitalization.

How can timber REITs leverage their available capital, given the fact that they must distribute, and cannot retain, earnings? Over time, timberland-owning REITs have identified and employed multiple investment strategies to leverage available capital. These strategies include:

• “Recycling capital” through programs such as 1031 like-kind exchanges;
• Buying back company shares through repurchasing programs; and
• Organizing joint ventures (JVs) to share risk, access capital  and leverage expertise.

In the end, each of these represent approaches to enhancing returns from the same pool of internal capital and assets. In this post, I focus on JVs related to timberland.

Timber REITs, like their vertically-integrated forest industry predecessors and cousins, have structured JVs to invest in manufacturing assets and explore emerging bioenergy markets (for example, consider Weyerhaeuser’s JV with Chevron). However, unlike REITs that focus on commercial real estate, JVs specific to timberland assets remain relatively uncommon. One notable exception is Plum Creek’s (PCL) “Timberland Venture” with The Campbell Group (TCG), a timberland investment management organization (TIMO).

In October, 2008, PCL contributed 454,000 acres of Southern timberlands and TCG contributed $783 million in cash to Southern Diversified Timber, LLC (“the Timberland Venture”). In exchange, PCL received a $705 million preferred interest and a 9% common interest, while TCG received 91% of the Timberland Venture’s common interest.

PCL’s preferred interest entitles it to a cumulative preferred return equal to 7.875% per annum. TCG manages the JV’s timberlands, which are located in six states: Oklahoma, Arkansas, Mississippi, North Carolina, South Carolina and Georgia.

For PCL, the JV transaction was both earnings and cash flow accretive, while allowing the firm to maintain an interest in potential upside. Separately, PCL received cash of $783 million through a loan from the JV. The transaction, structured as such, provided certain tax advantages relative to standard divestiture, and supplied PCL with capital that was used, in part, to retire debt and repurchase stock.