Investing in Timberland REITs

Understanding timberland REITs

Timberland REITs own and manage timberland real estate. They harvest and sell timber to lumber mills and wood product manufacturing facilities owned by the REIT or a third party. Timberland REITs also focus on maximizing the value of their land holdings, which can include selling it for various uses other than for growing timber, such as conservation or housing.

This business model makes timberland REITs different from many other REITs. Most REITs generate relatively stable rental income by leasing their real estate to tenants. On the other hand, timberland REITs earn income by selling timber, wood products, and real estate. The price of the commodities tends to ebb and flow with supply and demand, making earnings more volatile. Timber REITs can be similar to other cyclical stocks that produce commodities, such as basic material companies and oil producers.

Advantages of investing in timberland REITs

There are a few advantages to owning timberland REITs in your portfolio, including:

• Solid lumber investment play. Higher timber prices can drive up timber REIT earnings. That makes timberland REITs a great way to invest in lumber when the market is on a cyclical upswing. The housing market is a big driver of lumber prices, making timberland REITs another way to invest in housing.
• Increasing timber demand. While lumber prices can be volatile due to changes in demand, they tend to increase over the long term. A growing population drives the need for more housing and more lumber.
• Inflation hedging. As a commodity, lumber benefits from inflation. Timberland is a good inflation hedge since rising lumber and land prices should boost the value of a timber REIT's land portfolio and its cash flow from selling timber, wood products, and real estate.

Risks of investing in timberland REITs

The risks of timberland REITs aren't insubstantial, however, and should also be considered before investing. These include:

• Possible volatility. While timberland REITs benefit from higher lumber prices since that will boost their revenue and earnings, falling lumber prices can cause revenue and earnings to decline. That variability can make timberland REIT stock prices more volatile than other REITs. Periods of prolonged lower lumber prices can force a timber REIT to reduce its dividend.
• Unpredictable natural disasters. In addition to commodity price risk, nature represents another risk for timberland REITs. Wildfires, weather events, diseases, and insects can all destroy timberland. The effects of climate change could have an outsized impact on timberland REITs.
• Interest rate risk. Meanwhile, timber REITs also face a risk common to all REITs: interest rate risk. Like other REITs, timberland REITs tend to borrow a lot of money to acquire property. As interest rates rise, a timberland REIT's interest expenses can increase if it has a floating rate or an upcoming debt maturity.
• Potential for declining stock prices. Rising interest rates also increase the income yield on lower-risk investments such as government bonds. That gives income-focused investors more options. As a result, REIT stock prices often decline, and dividend yields are increased to compensate investors for their higher risk profile. Some of this risk can be offset with appropriate portfolio diversification, even if you prefer to keep all your money in REITs. 

Three timberland REITs to consider in 2025

There are three publicly traded timberland REITs: