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.
Nothing to add or critique. Sound logical analysis as usual. I just want to let you know you have at least one faithful and interested reader out here reading your posts.
Thank you, Mike. Greatly appreciate your comments and readership.
This is a wild and sticky subject. One that I’ve had numerous, contentious arguments over with investors, industry experts, even my own partners. The thing about timberland is that, by and large, timberland owners/investors are either well capitalized and/or understand the liquidity component (and have planned for it). Usually both. So everyone is sort of in the same boat. Meaning that it is unlikely that a large number of timberland owners will need to sell at any given time and over a similarly compressed timeline. There are two sides to a market, supply and demand. If there’s no supply, does it matter that there is no demand (or that it’s difficult to quantify in the absence of transactions)? If you have confidence that everyone holding the asset isn’t going to run for the exit, at the same time, is illiquidity a negative attribute?
Agreed. Part of what makes timberland attractive includes return characteristics and capital preservation that rely on some “independence” from the overall market, which we could call illiquidity, but, to your point, does it matter if we do (for the types of investors you reference)? Thank you for sharing your perspective; we’ve had similar conversations 🙂