What Is a Timber Investment Management Organization (TIMO)?

What Is a Timber Investment Management Organization (TIMO)?

Let me tell you directly: A Timber Investment Management Organization, or TIMO, is essentially a management group that helps institutional investors handle their timberland investment portfolios. As someone who's looked into this, I can say that a TIMO functions like a broker for these big clients, scouting out, analyzing, and acquiring the best investment properties that fit their needs.

Once they've picked a property—similar to how some REITs operate—the TIMO takes over the active management of that timberland. Their goal is straightforward: to generate solid returns for the investors.

Key Takeaways

If you're an institutional investor eyeing timber and timberland, you often turn to TIMOs for guidance. These organizations act as intermediaries: they research, buy, and then manage timber investments on your behalf. Remember, timber is viewed as a strong diversifier for your portfolio and a hedge against inflation— that's the core of it.

Understanding Timber Investment Management Organizations (TIMOs)

TIMOs emerged in the 1970s right after Congress passed the Employee Retirement Income Security Act, which pushed institutional investors to spread out their portfolios. Before that, timberland investments were mostly handled by forestry companies, big and small. By 2007, according to a Realtors Land Institute study, TIMOs were managing around $60 billion in land.

At first, forest conservationists liked the idea of TIMOs because they separated land owners from the wood mills that process the lumber. But over time, those same conservationists realized TIMOs aren't about maximizing forest preservation in America. No, their focus is purely on delivering maximum financial returns to investors. A Pinchot Institute for Conservation study points out that private forest lands are getting converted for development at about 6,000 acres per day.

Forisk Consulting keeps tabs on the biggest TIMOs in the U.S. They have a list of the top 10 U.S. timberland owners by acreage for 2021, comparing it to the previous year. TIMOs occupy six of those top ten spots. (Note: There's typically a table or image here showing owners like those in the U.S. and Canada, but I'll describe it plainly—it's a ranking that highlights TIMO dominance in the sector.)

Why Invest in Timberland?

According to the Realtors Land Institute, timberland returns have held up well against stocks, but with far less risk and ups and downs. Others note that as the industry has grown, returns have fluctuated. They dipped negative for a year after the 2008 financial crisis but have been climbing since. We measure U.S. timberland performance with the NCREIF Timberland Property Index. For instance, from Q2 2020 to Q2 2021, returns were just 1.46%, compared to the S&P 500's 18.4% in 2020. One year isn't the full picture for long-term performance, but it shows how asset classes can vary annually.

Sure, TIMOs can get institutional investors into U.S. timberlands for diversification, but you should treat these as part of a broader portfolio mixing stocks, bonds, commodities, and more. Beyond market-driven wealth building, there are solid reasons to add timber to your mix.

Demand for timber keeps rising. Since 2008, it's grown with new forest product developments, and even paper recycling hasn't dented it much. The Society of American Foresters says every American uses the equivalent of a 100-foot tree yearly.

Timber hedges against inflation. It grows in value 'on the stump' faster than inflation rates. Investor Jeremy Grantham notes that from about 1905 to 2005, timber prices rose around 3% above inflation.

Timber returns have beaten stocks historically. Using the NCREIF Timberland Index from 1990 to 2007, timber's annual compounded return was 12.88% versus 10.54% for the S&P 500, with less volatility—Sharpe ratios of 1.06 for timber and 0.45 for stocks.

Timber has low correlation to other assets. Its prices respond to unique market and economic factors, not the same as stocks, bonds, or real estate. From 1990 to 2007, the NCREIF Index showed moderate to weak correlations with equities and fixed income, and negative with real estate, boosting overall portfolio diversification.

Finally, investing in the land itself as an appreciating asset. Most timber investors buy the land outright rather than lease it. Land supply is finite, and demand grows with population and development. Some spots can be sold at a premium for 'higher and better use' to developers. Risks exist, like market collapses for timber products, but timberland acts as a natural storage—hold the trees until demand returns. Natural disasters like fires or weather can hit, but even after Mount St. Helens in 1980, damaged timber was sold and land replanted for future gains.