Market Perspective

Why Invest In Timberland?

Posted by on May 5, 2011 in Bill Grant, Perspective | 0 comments

“Money still grows on trees” as a past article (“For Some, Sound of Profit Is Timber”) in the Wall Street Journal has mentioned.  As a long-term investment, timberland has outperformed the Standard & Poor’s 500 stock index.  Pension funds, insurance companies and investment trusts  among others, have increased their holdings in timberland dramatically over the last 25-30 years because of this realization. There are several factors that play a roll in making timberland an attractive asset: “Under all is the land” meaning that the land is a separate asset apart from the timber.  The “highest and best use” may change over time and has a separate value from the timber; however, the type and amount of timber can have some influence on the land value. Timber is a crop, even though it has a longer rotation than corn or soybeans.  If it is managed properly, it has a good rate of return with a periodic income stream from thinnings and a final harvest. Unlike corn or soybeans this crop does not have to be harvested at a set time.  To maximize return, it should be thinned and harvested within a certain window of time, but that window is fairly broad.  Thinnings could have a two to three year window with the final harvest having an even broader window.  This allows you to pick the best markets for your timber sales.  We have seen this increase the final return by as much as 25% in some cases.  Timing is everything. The return from the sale of timber and land is a taxable event, but in most cases is as a capital gain rather than ordinary income.  Unlike stock which pays dividends and is taxed as ordinary income, land and timber “dividends” are their growth and you do not draw those “dividends” until you sell either the land, timber, or both.  Here again you can pick the time that is most beneficial to you to have that taxable event. Timberland is a fairly stable asset.  It does not have the wild “ups and downs” of the stock market.  This is why pension funds and insurance companies like timberland investments.  Timberland is much like high grade bonds as a long-term investment over ten years or more.  It has a good up-side potential if you catch the markets right. Over the long haul, the return can be quite attractive because it keeps producing.  In many cases a single property has funded college educations and more for both children and grandchildren. It helps the environment.  A vigorous growing stand of timber removes carbon dioxide from the air and produces oxygen.  Also, with newer technology, the biomass from forests could soon be used on a wider scale as an alternate, cleaner source of energy. In these uncertain economic times, a timberland investment is a great hedge against inflation.  Historically, timber values have increased at a greater rate than the rate of inflation. Timberland prices are now in a range that makes this type of investment much more attractive. A timberland investment is not something that you can go away and forget about.  The key to a good return is first – it must be the right property at the right price and second – it must be managed properly.  If mistakes are made in either...

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What Is A Timber Cruise?

Posted by on Apr 27, 2011 in Jeff Huff, Perspective | 0 comments

For new and existing timberland owners, a timber cruise is a rather inexpensive first step in determining the current volume of merchantable timber on your property and its market value.  A timber cruise is normally completed by a consulting forester prior to the timber being sold; however, it is also done in conjunction with a forest management plan as baseline data for short- and long-term forest planning. Fees for the timber cruise vary by consulting forester.  The fee is either charged on a per acre basis for larger tracts (100 acres +) or a flat fee amount for smaller tracts.  It covers the forester’s travel, cruising (i.e., labor) and office costs for completing the timber cruise report. The Society of American Forester’s Dictionary of Forestry defines a timber cruise as “a forest survey to locate and estimate the quantity of timber on a given area according to species, size, quality, possible products or other characteristics” (SAF 1998).  A consulting forester can utilize one of a number of sampling techniques to locate and estimate the timber volume on your timberland tract(s).  The three most common techniques include: Point Sampling with a Prism – Less labor intensive and based on the basal area (BA) of individual “in-trees” at each sample plot.  Most common technique. Fixed Area Sampling – More labor intensive and includes counting all merchantable trees within a fixed area around a plot (e.g., 1/10th acre). 100% Tally – Most labor intensive technique and most accurate because every tree is tallied and measured.  Used on smaller tracts (or stands) where there is significant timber volume/value to justify the increased sampling accuracy. The completed cruise reports vary based on the individual forester’s preference or their client’s needs.  Some are as short as one page with a breakdown of species volume and the value estimate.  Presented in booklet form, Grant Massie Land Company’s timber cruise reports include various stand/property maps (i.e., topographic, location, aerial, forest type map, etc.), cruise statistics, an indicated fair market value range, and conclusions/ recommendations. If you are considering a timber sale in the future or are interested in a timber cruise, please contact Jeffrey Huff (804-750-1207) or Bill Grant (804-754-3476) to discuss how Grant Massie Land Company can help you with your forestry needs. Literature Cited Society of American Foresters (SAF), 1998. The Dictionary of Forestry. The Society of American Foresters, Washington D.C. 210...

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What is the Value of My Property in Today’s World?

Posted by on Apr 20, 2011 in Bill Grant, Perspective | 0 comments

In these turbulent economic times, many of us are wondering what our property is worth or is it saleable at all.  As my partner, Ned Massie, has often said – “If you offer it for a dollar, someone will buy it; but if you offer it for $5 million there may not be many buyers depending on what the  property is.”  Obviously, the value will probably be somewhere in between. The present market is totally different from the market we became accustomed to during the period from 2000-2006 when values in many cases doubled and sometimes even tripled.  During that time, there was a lack of supply of land and a very high demand and money was easy to come by.  This drove prices up at a very rapid pace.  Many people wanted to be a part of that action and became landowners and did well.  Many of us “old timers” who have been through several ups and downs in the real estate market had a sense that sooner or later the cycle would end.  It definitely did end and the paradigms have changed.  Each downturn has had different characteristics and this one is no exception. In today’s market, borrowed money is very hard to come by.  Since the near collapse of our banking system, financial institutions are very reluctant to loan money for real estate, particularly land.  Money for development is almost non-existent.  The back-log of building lots appears to be an increase in the sale of new homes in certain market segments which may take up some of the inventory and create some future demand for development land.  Our land database indicates that the market has reached the bottom and leveled off.  With the stricter lending requirements the development market will be slow to make any significant increases. In this slow economy and increased land inventory, it is definitely a buyers market and “cash is king”.  Buyers are looking for good value in the properties that they buy and are looking for a future return which may be slow to come whether it be esthetic return, a return on timber or future development return.  These are all factored into their offering price.  Most do not wait long for a decision from the seller but move on to one of many other properties that are available.  The properties that are getting the most attention are the ones with unique features or some “magic”.  The “right price” can always be “magic” for properties that have unique attributes as well as those that lack those unique features. To answer the question – Is my property saleable?  Yes it is, but keep in mind that there is much more competition in the marketplace than we have been used to in a number of years.  You have to be competitive to be in the game.  Keep in mind also that your land investments probably have not taken as big a hit as your stock portfolio; however, there are some exceptions to that.  The type of land you own will determine the impact that this recession may have had on your values.  Development and transitional land appear to have taken the biggest hit.  Rural farms and timberland have been impacted less as a whole, even though there has been some decline in those...

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An Economy With A Split Personality

Posted by on Oct 21, 2010 in Ned Massie, Perspective | 0 comments

Almost every small business owner that I know that is still in business is operating on fumes.  That is especially true of folks associated with real estate. But the stock market is doing “very nicely, thank you”.  The talking heads chat about record earnings, international growth, and seem oblivious to the pain of the majority of business and professional folks with whom I speak on a daily basis. Is the problem that I spend my time with the wrong folks?  Do I need to change the people with whom I have done business for years?  What is wrong with this picture? The answer is neither of the above.  Rather, the answer is found by looking at the access to capital…the mother’s milk of business…and the origin of the term “capitalism”.  What a wonderful word… “Capitalism”. Capitalism describes the economic formula wherein businesses invest capital in assets in several forms including human, equipment and real estate in order to produce goods and services (products) needed by society.  Capitalists know they are providing a needed service to society when their investment efforts earn “profits”. Those profits encourage more investments in producing those goods and services until the supply equals demand.  Once that point is reached, profits diminish thereby removing the incentive to produce more. This interaction is the “invisible hand” often referred to in economic literature originating with Adam Smith.  There is no better system for the allocation of resources than capitalism. THE KEY to capitalism is access to capital that can be used to make investments.  Since few are so fortunate as to be able to grow a business out of their spare change, credit is typically required.  The source of credit is banks and for the typical small business comprising 70% of American businesses that means a community bank. For the last year, the federal bank examiners have been forcing the community banks to reduce their loan portfolio, especially the real estate portion of their portfolio.  Examiners have the power and tools to make it exceptionally painful if a community bank does not do that which the examiners want done. So, now you understand the reason for the split personality in the economy.  The publicly traded companies have access to capital from the big banks.  The small business’s source is the community banks that are being forced to shrink their loan portfolio. A reduction in the available credit to 70% of the businesses means the economy will be slow.  A contraction of credit is the definition of a recession. The Fed’s efforts to accelerate the economy by printing money while simultaneously forcing community banks to shrink is dangerous to the value of the American Dollar.  Unfortunately, the most likely outcome will be significant inflation as the resulting economic recovery will resemble a car stuck in a ditch that suddenly gets traction for its tires and lurches out of the ditch uncontrollably. When the bank examiners let the community banks make real estate loans again, the economy will improve.  Perhaps that will occur in mid 2011 to 2012. In the meantime, this is the time you want to hedge your investments for inflation.  Not all land will benefit from inflation to the same degree.  Call us, we would enjoy helping you position your land investment portfolio for the inflation that...

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4 Million Plus Per Year

Posted by on Oct 7, 2010 in Ned Massie, Perspective | 0 comments

In the media there is a great deal of discussion by various talking heads trying to compare Japan in the 1990’s and the United States in 2010. A variety of economists as well as reporters have expressed their opinions on this topic. Listening to all these people, it is very easy to become confused. I have always found that FACTS, when collected and analyzed, often make confusing situations much clearer. There are a lot of things that are comparable between Japan and what it has experienced economically since 1990 and what the United States is experiencing today. You can go through the whole litany of low interest rates creating a real estate bubble, a financial services bubble, a financial panic and then a subsequent economic crash. The list continues because the Japanese central bank and the American central bank both have followed similar courses of action – offering exceptionally low interest rates while helping banks earn their way out of the situation as opposed to simply cleaning the debris off their books. Additionally, both had a variety of bailouts by the respective governments who preferred the pain and agony of a long recession to an abrupt pain from cleansing the economy of the excess. When you are in a position of leadership, one of your goals is to minimize the pain for your constituents, especially those who supported you. It is understandable but as misguided as a parent not disciplining their child. However, in all the discussion by all of the “experts” there is one enormous fact that the “experts” have all ignored – demographics. The demographic trend of Japan is simple – there are not enough babies being born to replace the population of Japan. Hence, the population of Japan is aging and the number of Japanese is declining. Contrast that to the United States where our population has been growing. In fact, the generation known as Gen-Y, which is today between the ages of 10 and 29, is estimated to be the largest generation of Americans ever at approximately 87M. That means that the cohort known as Gen-Y is almost 50% bigger than Gen-X, the generation immediately in front of it, and 10% larger than the Boomers were at their peak. Let me rephrase that information. Currently, there are more than 4 million Americans reaching the age of 22 every year. In fact, that will occur each year for at least the next 22 years. The significance of this is that in order to house them, and assuming that they paired up, we would need to generate at least 2 million housing units per year each year for the next 22 years to meet the demand. In 2010, America is going to build something around 300,000 housing units. Expressed otherwise, that is about 1.7 million housing units less than demand. Now, demand may be deferred and there is no doubt that jobs for these young Americans are important so that they have the financial ability to lease an apartment or buy a house. However, unemployment is 10%, not 100%. So to the question “is the United States going to have a lost decade suffering deflation like Japan?” …the answer is NO. The demand is in place…they have been born each year for the last 22 years. Our...

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An Illiquid Market Has Benefits

Posted by on Sep 10, 2010 in Ned Massie, Perspective | 0 comments

In our analysis dated in November of 2009 called “RE/Set RE/Position RE/Start”, which is available for download on our website, we outlined the four stages of the real estate cycle. For those who have not read the report, the first stage is the Boom, followed by a Decline, followed by an Illiquid Market, followed by Recovery. The real estate market in central and southside Virginia has been in the Illiquid Market phase for approximately 12 months. It was the summer of 2009 that the bank examiners began to force banks not to make loans on real estate, even if they were exceptionally good loans. Even more critical is that the examiners want the banks to reduce the percentage of their loan portfolio that is in real estate loans. It is not the quality of the loan that is critical, it is whether or not it is a real estate loan. Some of the stories in the industry are remarkable illustrations of this misguided attitude. If you asked me to identify the single greatest barrier to a rebounding economy, it is the current attitude of the bank examiners and therefore the bankers. Second would be the lunacy of raising taxes on entrepreneurs, but that is another topic. To an investor, the illiquid real estate market is an absolutely amazing opportunity. The best real estate investments are made in the trough of a real estate cycle, not at the peak. In a trough the prices are “softer” and a buyer has the improved perspective of identifying the real strength in the real estate market. The opposite is true at the peak of a cycle when everyone thinks everything is great…a form of delusion. The current opportunity in the real estate market can best be illustrated by the stock market comparing March of 2009 with the market in the fall of 2009. Most of my investments are in real estate as opposed to the stock market, but in February of 2009, I figured that the stock market was somewhere close to its bottom. I knew that I couldn’t predict the absolute bottom, but I just wanted to get my money invested at somewhere close to the bottom and ride it up as it recovered. In February of ’09, I purchased stock in approximately 10 different companies. The stocks I selected were stocks that would benefit from an economic recovery of a period of several years. I have to admit that in March of 2009 as I looked at my portfolio and realized that all of them had lost value, there was a short-term concern. But I remained convinced that I had bought companies whose stock would benefit from the economic recovery. In September of ’09, I once again looked at my portfolio and realized that all were in the black. In fact, approximately five of the 10 stocks had more than doubled in less than seven months. After thinking about it for a few days, I decided that anything that more than doubled in less than seven months needed to be harvested because that was such a phenomenal annual rate of return that it would be hard to beat. Therefore, I sold half of my portfolio in September of 2009. In the real estate market, there are similar opportunities today. In the...

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