It’s December 31, 2010 and you’re sitting on a pile of cash. Do you invest in the S&P 500, an all-REIT index, private timberlands or publicly-traded timber REITs? Based on the performance of key indices, putting your chips in with public timber REITs for the first half of 2011 would have financed your NFL season tickets and three bottles of Pappy Van Winkle (see table). What explains the outperformance? Is this a short-term, steroid-induced, Lenny Dykstra surge, or longer-term, touchdown-accumulating Dan Marino consistency?
As with all things timber, investment models, benchmarks and timeframes matter. In practice, timberland investments require high initial investments and longer placement periods, while public timber REITs provide easily-traded alternatives. It’s the difference between investing in a high maintenance, portfolio-stabilizing hard asset and a liquid, dividend-yielding, more volatile equity. Over the first quarters of 2011, US timberlands (as measured by the NCREIF Timber Index) and timber REITs (as measured by the Forisk Timber REIT (FTR) Index) returned 1.4% and 15.9%. Over the past ten years, US timberlands and timber REITs returned, on average, 6.8% and 6.7% per year.
Why the recent timber REIT pop? Factors driving strong recent performance are primarily firm-specific. The FTR Index includes four publicly-traded timber REITs, Plum Creek (PCL), Rayonier (RYN), Potlatch (PCH) and Weyerhaeuser (WY). Key events driving equity returns in 2011 include (1) Weyerhaeuser’s REIT conversion from a C-corporation and (2) Rayonier’s strong results from its performance fibers business. At the sector level, timber REITs benefitted from their different use of and exposure to debt markets relative to the other REIT sectors, which employ, in cases, more leverage and access the stomach-churning CMBS markets.
Timber REITs: Q2 2011 Performance Summary
Plum Creek (PCL) and Potlatch (PCH) offset weak log markets with land sales. Their results indicated continued weakness in those segments affected by housing markets (timber harvesting and wood products manufacturing). Both firms generated cash with higher sales of timberlands. While sawlog pricing in the West still benefits from strong export demand (primarily China), sawlog prices in the South remained under pressure due to dry weather and weak demand. (Dry weather provides optimal log harvesting conditions and, therefore, increases potential supplies in the down market.) Southern pulpwood prices also weakened due to weather related reasons.
The balance of the public timber REITs, Rayonier (RYN) and Weyerhaeuser (WY), also reported weakness in their housing-exposed business segments. Alternately, improved log volume and pricing in the Pacific Northwest and stronger results from their Fibers businesses provided good news.
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