U.S. private timberland property investments returned 9.20% in calendar year 2021, with annual gains in both income and capital appreciation. Timberland income in 2021 reflects strong underlying demand in the United States for wood-based construction, placing upward pressure on timber prices and boosting net operating income. 2021 timberland capital gains reflect strong timberland property valuations from third-party appraisals based on deep comparable sales activity to benchmark.
The National Council of Real Estate Investment Fiduciaries (NCREIF) collects U.S. timberland property-level performance realized by institutional investments and reports within its Timberland Property Index (TPI).1 The 2021 calendar year total return of 9.20% for the TPI is an increase of 836 basis points (bps) from 2020, and above the average annual return level over the past 10 years (5.36%) and 20 years (6.60%).2
In 2021, NCREIF’s TPI incorporated performance metrics from 454 distinct timberland properties with a combined area of 13.3 million acres across the United States, a combined market value of US$24 billion. NCREIF separates total returns into two components: net operating income (EBITDDA)3 and realized capital gains (or losses). In 2021, timberland performance was above average for both net operating income and capital appreciation across the United States. Net operating income for private timberlands rose to 3.45% for the calendar year, up from 2.50% in 2020, and above the average annual income over the past 10 years (2.80%). The capital appreciation component of the TPI is based on annual third-party appraisals of timberland market values, which is required for all properties included in the NCREIF TPI. In 2021, capital appreciation of 5.58% represented a 741bps turnaround from 2020’s capital loss of -1.70%.2
Strong timberland performance across all U.S. regional markets in 2021
NCREIF timberland performance is reported for four geographic regions within the United States: Lake states, West, South, and Northeast. The TPI is heavily weighted toward the South, which represents 66% of the index by market value. Southern timberland properties in the TPI are predominantly pine plantations, with a smaller percentage of mixed pine/hardwood forests. Timberland properties in the Western United States represent 25% of the U.S. index by value and the remaining 9% is split between high-value hardwoods and mixed softwood/hardwood timberland in the Northeast (5%) and the Lake states (4%).
Across major subregions in the United States, 2021’s annual total return ranged from 7.0% in the South to 14.4% in the West.2 The Northeast’s timberland property performance for calendar year 2021 was 13.2% and 7.4% for the Lake states.2
Accounting for nearly two-thirds of the market value of the TPI, the total return for private timberland in the U.S. South, at 7.00%, is a gain of 545bps from 2020 performance (at 1.60%), compared to the average total return for the region at 4.57% over the past decade.
Total timberland returns in the U.S. South for 2021 comprised operating income at 3.10% and capital gains at 3.90%. Operating income in 2021 is above the region’s 10-year average income return of 2.60%, and 55bps over 2020’s operating income. Capital appreciation in the U.S. South for 2021 was 481bps above 2020’s capital appreciation, and twice the average capital appreciation over the past 10 years.
Private timberland investments in the U.S. West, which account for over a quarter of the market value of the overall TPI, recorded net operating income of 4.60%, the strongest among regions. And coupled with 9.50% capital appreciation, they produced the highest overall regional total return in 2021. Calendar year performance in the U.S. West for 2021 was above its 10-year average net operating income (3.58%) and double the average capital appreciation gains (4.38%) over the past decade.
U.S. Northeast timberland, although a small share of the total TPI, experienced significant gains in 2021, with the second-highest performance across the United States. Total return in the Northeast (at 13.20%) is 1,797bps above 2020’s return, and well above the 10-year annual average of 2.46%. Northeast performance was driven by capital gains of 10.30%, a 1,616bps increase from 2020. Operating income in the U.S. Northeast was 2.70%, which is above 2020 income (at 1.20%) and near the 10-year average operating income for the region (at 2.40%).
Timberland performance in the Lake states (7.40%) was 450bps above the total return in 2020, and above the region’s 10-year average total return of 5.13%. Operating income was strong in 2021, at 3.70%, well above the region’s annual average of 2.00% over the past decade.2
U.S. timberland performance in 2021 reflects a strong year for new construction demand, enhanced home repair and remodeling expenditures, and increased timberland property valuations based on third-party appraisals using deep comparable sales activity to benchmark.
Timberland market indicators through year-end 2021
U.S. housing starts measured 1.644 million units during the fourth quarter of 2021, up 1.575 million units from the same quarter in 2020. Single family housing starts, which are building types that historically use the largest amount of wood material, made up 70% of the total housing starts in the fourth quarter, down from 77% in the fourth quarter of 2020. Total housing starts advanced in the first two months of 2022, reaching 1.77 million units in February at a seasonally adjusted annual rate (SAAR). Softwood lumber prices, as measured by the Random Lengths Framing Lumber Index, remain extremely volatile, spiking above US$1,200/MBF in mid-2021, and then falling by over 60% in the third quarter last year. This was followed by an upward turn, increasing by 45% to average US$691/MBF during the fourth quarter of 2021. Solid demand for construction material has faced supply chain bottlenecks, causing extreme price responses.
Australia dwelling approvals in the fourth quarter of 2021 measured 49.44 thousand units, a fall of 10% from the third quarter, representing a retreat of 22% from the near-term high level reached in June 2021. Single home dwellings, at 31.94 thousand for the fourth quarter of 2021, were down 7% from third quarter and 12% from fourth quarter of 2020. Weakness experienced due to the unwinding of the Homebuilder program—the Australian government’s assistance offered to eligible households to encourage building a new home or renovating an existing home—ended in March of 2021.5 Dwelling approvals into 2022 have been volatile, with COVID-19 disruptions and seasonal adjustments affecting approvals through February. Growth in the price of softwood lumber in Australia slowed during the fourth quarter of 2021—moving upward just 2% from the third quarter yet reaching a level nearly 40% higher than prices for the same quarter in 2020.
During the fourth quarter of 2021, the U.S. dollar appreciated slightly against the Brazilian real (2%) and against the Chilean peso (5%). Whereas slight weakness in the U.S. dollar relative to the Australian dollar (-0.7%) and the Canadian dollar (-0.3%) occurred in the fourth quarter, a strengthening New Zealand dollar gained 0.75% against the U.S. dollar. In 2022, the U.S. dollar is finding strength against most currencies as the U.S. Federal Reserve tightens policy, global growth slows, and risk appetites remain fragile.
Softwood sawtimber prices in the U.S. South grew 4% in the fourth quarter relative to the third quarter, a 14% increase over fourth-quarter prices in 2020. Strong demand due to the increasing capacity of lumber and panel mills is beginning to put pressure on U.S. South regional prices. In the U.S. Pacific Northwest, softwood sawtimber prices responded to increased demand at regional mills in late 2020 and have remained strong in 2021—with fourth-quarter prices flat from third-quarter levels. Radiata pine export sawtimber stumpage prices corrected in the fourth quarter, down 26% from the third quarter and off 45% from the recent highs in price levels seen earlier in the year. Both a fall in radiata pine import prices in China and rising shipping costs have pulled New Zealand stumpage prices down. As shipping costs have further increased and as China struggles with COVID-19 lockdowns, radiata pine stumpage prices have fallen further this year.
Cash yield from timberland operations in the United States in the fourth quarter was 2.75% on an annualized basis, down from the strong 3.60% yield seen in the third quarter, yet above the 10-year fourth-quarter average yield of 2.40%.
U.S. timberland values in the U.S. South appreciated in both private (as measured by the NCREIF) and in publicly listed ownerships (as measured by Manulife Investment Management, Timber and Agriculture’s Timber Enterprise Value per Southern Equivalent Acre (TEA/SEA). Publicly listed company southern timberlands reached US$2,596 per acre, representing a 14% increase from the third quarter and a 12% increase since the fourth quarter of last year. Increased share prices for publicly listed companies within the TEV/SEA, fueled by strong balance sheets benefiting from lumber and panel price gains, drove southern timberland enterprise values. Private timberland in the U.S. South, at US$1,850 per acre in the fourth quarter, reached a new high—up 3% from fourth quarter 2020 timberland values and 7% higher than the 10-year average.
1 Manulife Investment Management is a participating member in the NCREIF Timberland Property Index. The index requires participating managers to report all eligible properties to the index. Usage of this data is not an offer to buy or sell properties. 2 NCREIF Q4 2021 Timberland Property Index. 3 EBITDDA represents earnings before interest, taxes, depreciation, depletion, and amortization. 4 https://treasury.gov.au/coronavirus/homebuilder
Notes on Quarterly U.S. South timberland values (USD per acre) chart source: NCREIF, December 2021, Manulife Investment Management timberland research, December 2021. Public equity values are derived from Manulife Investment Management’s Timberland Enterprise Value (TEV) per Southern Equivalent Acre (SEA) calculation for five timber-intensive publicly traded companies as compared to southern timberland values per acre calculated from the National Council of Real Estate Investment Fiduciaries (NCREIF) database. TEV is a quarterly estimate based on total enterprise value (total market equity + book value debt) less estimated value of processing facilities, other non-timber assets, and non-enterprise working capital. SEA uses regional NCREIF $/acre values to translate a company’s timberland holdings in various regions to the area of southern timberland that would have an equivalent market value. Manulife Investment Management is a participating member in the NCREIF Timberland Property Index. The index requires participating managers to report all eligible properties to the Index. Usage of this data is not an offer to buy or sell properties.
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