Wood is having a moment. The past year has seen demand for lumber at an all-time high—driven by record housing starts and the building of outdoor structures during the pandemic. The demand for wood, a preferred building material for millennia, shows no signs of stopping. Changes to IBC building code will allow 18 story Mass Timber buildings and local legislation, such as in Colorado and NYC, dictate low carbon building methods. Wood, a natural building material derived by sucking CO2 out of the atmosphere during photosynthesis has less emissions embodied in its total lifecycle than heavy emitters like cement or steel. Based on these tailwinds, the demand for timber is expected to increase 17% from 2020 to 2025.
At the same time, the world is converging about the protection of forests. Deforestation at scale significantly accelerates climate change, biodiversity loss, and deleterious effects for many local communities. 137 Countries at the recent climate conference, COP 26, signed the Glasgow Declaration on Forests and Land Use pledging to “halt and reverse forest loss and land degradation by 2030 while delivering sustainable development and promoting an inclusive rural transformation,” The Task Force on Nature-Related Financial Disclosures (TNFD) will require financial institutions to report on financed biodiversity loss when it is implemented and the EU’s Sustainable Finance Disclosure Requirement (SFDR) requires publicly listed companies to report on biodiversity impacts by asset turnover. While deforestation is still a challenge in North America, some of the biggest global forestry battlegrounds are currently in tropical forests. The acceleration of deforestation in the Amazon rainforest, which is about twice the size of India and contains over 10% of the world’s known plant species, could single-handedly push climate change to a tipping point. Loss of trees could dry up the remaining rainforest by disrupting the self-sustaining wet microclimate.
The use of forests as a carbon removal and storage asset also decreases the supply of timberlands. A study by the Nature Conservancy concluded nature based solutions—restoring degraded landscapes like planting trees and grasslands—can sequester 37% of the carbon emissions necessary to keep global warming under 2°C. As of September 2020, companies and organizations have pledged $70 trillion of global assets under management to be carbon neutral—encompassing 60% of global carbon emissions. However, most pledged asset owners are unsure how they will achieve this goal. Voluntary carbon offsets are projected to grow 50x in the next year and forest carbon is a big part of that equation. In the past year, JP Morgan invested in Campbell Global—a forest offset asset manager, Microsoft and Salesforce invested in NCX—a platform that connects small scale forest owners with buyers hoping to buy forest credits, and BP acquired a majority stake in Finite Carbon, which is a marketplace for 3.1 million acres of forest. Beyond the forest level, there are bottlenecks in the supply of lumber due to the limited number of wood mills, trucking supply chain issues, and Canadian mountain pine beetle infestations.
So if there is an increase in demand for wood and new limits to supply, where will all this timber come from? Likely from North American Timber REITs. After decades of activism by environmentalists, many North American timber companies have moved to more sustainable forestry methods which requires them to only harvest a small percentage of their stands a year (1 to 5%), immediately replant, and put in place only protections to safeguard plants animals that call the working forest home like the spotted owl. Wood grown in sustainably managed working forests typically regenerate every 30 to 50 years. The REIT structure was established in 1960 with the goal of providing access to real-estate investments to everyday people—not just institutional investors and wealthy individuals. The structure requires 90% of its real estate income to shareholders, often in the form of dividends, for the advantage of not having to pay corporate taxes. Unlike traditional real estate REITS, the “rents” on timberlands often come from harvesting logs, which is a renewable resource, or leasing the timber land for recreational use or natural resource solutions.
The largest player in the Timberland market is Weyerhaesuer. As the owner of 11 million acres in the United States and lessor of 14 million acres in Canada, it is the largest private manager of forests in North America. Other large Timber REITs include Rayonier, Potlatch Deltic, and CatchMark Timber. Their holdings are voluntarily certified via the Sustainable Forestry Initiative® (SFI®), Forest Stewardship Council® (FSC®), and the Programme for the Endorsement of Forest Certification™ (PEFC™).
| Company | Timberland (mm Acres) | Top Line 5Y CAGR | Net Profit | Profit Margin | EBITDA | Total EV | EV/EBITDA | P/E | Debt/Equity | SBTi Committed | Refintiv ESG Score |
| Weyerhaeuser | 11.69 | 23.7% | 2,483 | 24.7% | 3,999 | 30,519 | 7.59x | 11.1x | 50.9% | SBTi 1.5°C | 64 |
| Rayonier | 2.24 | 21.1% | 154 | 14.6% | 461 | 6,708 | 14.2x | 34.4x | 75.9% | no | 50 |
| PotlatchDeltic | 1.79 | 34.8% | 587 | 41.1% | 692 | 3,941 | 5.7x | 7.8x | 48.4% | no | 72 |
| CatchMark Timber | 1.24 | 25.4% | 22 | 19.0% | 41 | 771 | 18.5x | 20.1x | 238.8% | no | 35 |
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