During a recent “Investing in Timberland and Timber REITs” workshop, a student asked about the “problem” of liquidity for timberland investors. We have posted on this theme before, and the issue clearly differs for those buying shares in publicly traded timberland-owning firms versus buying timberland acres in southern Mississippi, just as buying shares of Ford Motor Company differs from buying a Ford auto dealership. Still, the topic of liquidity – the ability to convert assets into cash – may generate more heat than substance.
What worries investors? One way to think about liquidity is to consider the situations where, as an investor, it might matter. If you have an asset that you want to sell, how long would it take and would you net a satisfactory price (or return)? These two questions get to the heart of the matter: speed and price. The inability to move an asset quickly may “cost” you something, and the need to accept a “below market” price because you are in a hurry also “costs” you something. In an emergency, a lack of liquidity affects your ability to extract value, and in the case of a market squeeze or crash, where sufficient buyers and sellers do not exist, you may not be able to move your asset at all.
In finance and investing, liquidity is an idea, a theoretic construct, that affects certain folks in certain situations; it does not affect everyone all of the time. In fact, liquidity only affects a small number of folks with any frequency. Some folks worrying about it may squander time and energy and, possibly, resources trying to protect themselves. Liquidity in practice is only a problem when you don’t have it or can’t get it, so from a portfolio perspective, the best strategy may be to account for liquidity at the portfolio level in advance.
This would be the way to think about timberland. It’s not a super liquid asset, so account for this fact up front and then table it as an issue. Maintain access to some cash or more liquid securities. While it helps to plan in advance how you might unload the timberland in an emergency, you can get part-way there by breaking down the forest asset into its salable components. These include timber and hunting rights and choice parcels. Every sizable timberland investment represents, in and of itself, a diversified portfolio of smaller assets. In most cases, the issue of liquidity for timberland is not an all or nothing proposition.