Why Timberland REITs are a Buy
Invest your treasure in a gold bar, and the size of your bar will be the same in 100 years. But invest that same treasure in a small forest, and the size of your treasure will grow, day after day.
Of course, physical growth is one thing; growth in the value of your investment is another. On that score, timberlands have also done just fine. Over the past ten years through October 31, private investments in land with trees for logging returned 6.9% annualized, compared with a 0.4% annualized loss for Standard & Poor’s 500-stock index. That’s one reason institutional investors have long included timberlands in their portfolios.
Individuals can buy into the sector through real estate investment trusts that own and lease timberlands and earn their profits harvesting trees. Residential construction is the largest end user of lumber, so demand and prices for timber have suffered along with housing during its slump. That makes it a good time to buy these REITs, because the price of timber is more likely to rise than fall from current depressed levels. REITs must pay out at least 90% of their taxable income to shareholders, making them ideal for income investors. And the majority of the income that timber REITs pay is treated as capital gains and so is likely to receive favorable tax treatment, even if the tax rate on dividends rises.
One well-managed company is Plum Creek Timber (symbol (PCL). Based in Seattle, Plum Creek is the largest private timberland owner in the U.S., with about 7 million acres across 19 states. In 2009, Plum Creek produced nearly 16 million tons of lumber. Matt McLennan, who holds nearly four million shares of the trust in the First Eagle Global fund he co-manages, says he has been favorably impressed with the management team. By selling acreage to private investors when prices are strong and using the proceeds to buy back stock, the company has increased its ratio of acres per share over time, he says. He also thinks management has been smart about deciding when to harvest trees and when to wait for better prices. The shares, at $38.72, yield 4.3% and are still 35% below their 2008 highs (all prices and related data are through the November 4 close). Analysts expect earnings to be roughly flat in 2010, compared with 2009, and grow 5.3% next year.
Another sound choice is Rayonier (RYN), which owns, leases or manages 2.4 million acres of timberland in the U.S. and New Zealand. Rayonier, which is headquartered in Jacksonville, Fla., also develops some of its real estate and produces specialty cellulose fibers used in a variety of manufacturing processes. In 2009 the company generated 46% of revenues abroad, with China accounting for 16% of sales and Europe accounting for 14%. In early October the company hiked its dividend for the first time in three years, from $0.50 to $0.54 per quarter. At $53.53, the stock yields 4.0%.
McLennan values timber REITs by looking at the land they own and the price for timberland in the private market, then comparing the value of the timberland to share prices (he adjusts for other assets and for pension and debt liabilities on the books). Today, timberland REITs are trading at “meaningful discounts,” he says.
One word of caution: Timber REITs are not for itchy-fingered traders. “When investors buy a home, they do so with the understanding they’ll own it for maybe five or ten years,” McLennan says. He advises investors to think of these stocks in the same way. Like real estate, “over the long term, timber has been a very good store of value,” he says. But to ride the industry through its ups and downs, you should invest with a time horizon of at least five years.