Knock on Wood

Edward Chancellor (0:07)

Hello, this is Edward Chancellor. Welcome to another episode of the Capital Cycle Podcast. I have with me Rob Anstey, who's a US portfolio manager for Marathon Asset Management. Hi, Edward.

Rob Anstey (0:19)

Very nice to see you again.

Edward Chancellor (0:20)

So Rob, we're going to talk about an interesting asset class, which like all asset classes, goes through periods of being in and out of favor. And today US Timberland, as we'll see, is very much out of favor.

My old boss, Jeremy Grantham, writes about Timberland in his memoir, The Making of a Permabear. And Jeremy's initial research, conducted in the early 1990s, found that US timber prices had climbed by around 3% a year in real terms over the previous 80 years, faster than the earnings growth of the S&P.

He also found that stumpage prices held up during the Great Depression. Another attractive feature of Timberland, possibly overstated, is that when lumber prices are no good, you don't have to cut it and the trees continue growing over time at no storage cost. Anyhow, back in 1990, Jeremy came across Woodland in New England that was selling for less than the value of the standing timber on its property. So he bought the land and started a renewable resources group at GMO, his firm. And over the next 15 years, timber became a hot new asset class. And early investors did very well until the arrival of the housing bust in 2006 Now, Rob, you find that US timberland is roughly as cheap today as it was back then.

Rob Anstey (1:44)

Well, yes, I'm not sure whether it's as cheap as it was then. I think if you look at the sort of stumpish value, actually, I think it's a lot cheaper now, but the land is appreciated. So, yes, you'd have to sort of look at it on an inflation adjusted basis. But nevertheless, I think it's cheap in a global context, for sure.

Edward Chancellor (2:06)

And you have two holdings in your portfolio.

Rob Anstey (2:09)

Correct. I own Rayonier, a sort of 8 billion market cap company, and WireHouser, which is about 20 billion. And the interesting thing here, you know, this very much ties in with Marathon's consolidating industries theme. Rayonier has just merged with Potlatch, which in turn had bought a company called Catchmark Timber a few years ago. So essentially Rayonier is those three Timberland REITs rolled into one now.

And WireHouser has also participated in industry consolidation. So those are the only two publicly traded Timberland REITs left in the US.

Edward Chancellor (2:48)

Relatively below the radar of large cap funds. And you believe that they represent outstanding value at this current moment, in part because Timberland and Lumber, as you say, have different associated capital cycles. And both these capital cycles appear to be close to the trough.

Rob Anstey (3:09)

Yes, so I think it's worth thinking a little bit about association between the two. So of course, lumber is the end product that you get when you harvest your tree. And I think there is a fascinating capital cycle going on in lumber, which we can talk about first. That's the downstream part of the equation.

But then of course, I also think there's another capital cycle in the actual forestry, which is a longer term capital cycle. So there's kind of two in one.

Edward Chancellor (3:38)

So let's start down the stream with the lumber capital cycle.

Rob Anstey (3:41)

Yeah, so lumber supply in North America has been declining. It's currently close to 10-year lows. Last year was the fourth consecutive year of a contraction in production.

And we've met with various industry players, and one of them told us that net lumber supply growth has declined at 1.6% per annum over 20 years.

Edward Chancellor (4:06)

So what are the reasons that lumber market has been so depressed?

Rob Anstey (4:10)

I mean, there's several. You know, the obvious one most recently, of course, is that the demand side of the equation is the US housing market, which has been extraordinarily weak.

Existing home sales are at around 4 million, and that's close to the lowest level in three decades, because consumers are not wanting to move off their low fixed rate mortgages.

Edward Chancellor (4:33)

Yeah, and that's one of the number of bets in your portfolio that are linked to the value opportunities thrown up by what must turn out at some stage to be a temporarily depressed US housing market.

Rob Anstey (4:45)

I think so at some point.

Edward Chancellor (4:48)

It's the inverse of the US housing bubble in the early 2000s. And actually, I did some work at GMO on that bubble, actually for our Renewable Resources Group. And what you found is there was massive overbuilding, of course, in the run up to the bubble. And this is the inverse, the anti-bubble in US housing today.