Timber REITs: Plum Creek Beats the Street

27 07 2010

After the market closed yesterday (July 26th), Plum Creek (PCL) reported its second quarter 2010 earnings of $35 million, or $0.21 per diluted share, on revenues of $258 million.  Neena Mishra, Forisk’s Director of Equity Research, put the results into context:

PCL’s earnings beat Wall Street’s consensus expectation of $0.15 per share and were up from earnings this quarter one year ago of $32 million, or $0.19 per diluted share, on revenues of $272 million.

The results benefitted from improvement in Northern sawlog prices, improved industrial demand for plywood and MDF products (though residential construction demand remains weak) and reduced supplies of MDF due to the Chilean earthquake, as well as from better-than-expected activity in the real estate segment.

The company continued to repurchase shares on pull-backs. During the quarter, it repurchased approximately 1.37 million shares at an average price of $36.37 per share.

Management now expects third quarter income of between $0.20 and $0.25 per share (slightly below analysts’ expectations) and 2010 income to be between $1.35 and $1.50 per share.

Recent housing data has not been encouraging.  As a result, while we remain somewhat cautious on the outlook for the current year, PCL remains attractive in our view for long term investors due to (1) its large, productive and diversified asset base and (2) for its income oriented investors who appreciate PCL’s juicy dividend yield, which will likely increase when the housing market recovers. Moreover, we believe that Weyerhaeuser’s (WY) conversion to a REIT will result in greater, positive investor interest in all timber REITs.*

*This theme will be addressed further during the “Applied Forest Finance” and “Valuing Timber REITs” courses on August 4, 2010 in Atlanta, Georgia


Weyerhaeuser’s Special Dividend: Thinking Through Shares and Taxes

21 07 2010

In a previous post, we detailed the timeline that would play out once Weyerhaeuser (WY) declared its special dividend, which is the final step required by the IRS for WY to complete its REIT conversion.*    WY pulled the trigger on July 12, 2010, declaring the special dividend of $5.6 billion.  Neena Mishra, Forisk’s Director of Equity Research, summarizes the results and implications for shareholders:

This special dividend represents the previously undistributed earnings since  inception that must be distributed to WY’s shareholders by the end of the year for which REIT status is effective. 90% of the special dividend ($5.04 billion) will be in stock (like a stock split) and 10% ($560 million) will be in cash. With shares outstanding numbered at 211.6 million, the per share amount would be $26.47 ($23.82 in stock form and $2.65 in cash).  The expected payment date is September 1, 2010 to shareholders of record on July 22, 2010. On the ex-dividend date (July 20, 2010), the share price adjusted to reflect the special dividend as follows:

  • Closing price per share on July 19, 2010:   $41.83
  • Special dividend per share:   $26.47
  • Adjusted share price ex-dividend:   $15.36

The shares opened today at $15.36 and moved higher during the day.

The actual number of shares to be issued by WY for the stock portion of the dividend will be determined by the average of the prices on August 24, 25 and 26. However, we can approximate the number of shares to be issued by the current market price:

  • Current market price per share:   $16.00
  • Stock portion of the dividend:   $5.04 billion
  • Approximate number of shares to be issued:   315.0 million (5.04 billion/16.00)

As a result of the stock dividend, the number of shares goes up substantially from 211.6 million to approximately 526.6 million.  Alternately, we can say that the stock dividend equates to a 2.5 for 1 stock split.  We note that the company is already considering a reverse stock split following the special dividend payout to reduce the number of shares outstanding.

The distribution is taxable to shareholders, who may pay 15% (or more) on the entire distribution of $26.47 per share or a tax of $3.97 per share.  If electing a 90/10 split for their distribution, shareholders will receive only $2.65 per share in cash. Due to tax implications, some investors might have refrained from buying shares or sold shares over the past few days.

We expect that the shares will see more upside in the coming days as (1) investors who sold or refrained from buying due to tax implications buy shares and (2) shares become more attractive to income oriented investors.  Management’s stated goals include growing its timber business, reducing debt and paying a competitive dividend going forward, most of which will be taxed as capital gains.  WY’s current dividend yield is 0.5% as opposed to the much attractive dividend yields of timber REIT peers PCL (4.7%), PCH (5.9%) and RYN (4.4%).

*This theme will be addressed further during the “Applied Forest Finance” and “Valuing Timber REITs” courses on August 4, 2010 in Atlanta, Georgia

How Much Woody Biomass is Readily Available for US Bioenergy Projects?

19 07 2010

If a tree falls in the woods, is it available raw material for a wood bioenergy facility?  Not necessarily.  Intense investment and regulatory focus on wood bioenergy has raised questions from both the environmental community and the traditional forest products sector regarding the potential impacts of evolving biomass policies and markets on the sustainability of forest supplies in the US.  Limitations of previous research into this area include insufficient accounting for what forest and wood residues are, in practice, logistically accessible and economically viable.  We addressed this issue through a study commissioned by the American Forest & Paper Association.  Key findings include:

  • In the US, the forest products industry, which consumed 522 million green tons in 2005, is returning to trend and expected to use 516 million green tons in 2015 and 534 million tons by 2020.
  • Nation-wide, 49.6 million dry tons of forest and wood-related residues are estimated to be “readily available” for bioenergy users.  Logging residues represent the single largest source (57%); mill residues represent the smallest source (3%). This does not include ~5 million tons of unused, pulpwood-sized material.
  • “Readily available” includes wood residues that are (1) unused by other wood raw material consumers and (2) directly accessible with existing logging configurations without major capital reinvestments.

The complete study, titled “Availability and Sustainability of Wood Resources for Energy Generation in the US,” is available here.

The Finance of Timberland Investments*

12 07 2010

As a researcher, I enjoy exploring and testing questions related to forest economics, wood bioenergy and timber investments.  Why?  The finance of forestry brings together a globally available, renewable asset with attractive investment characteristics that continues to generate interesting issues for investors.  These include:

  • What are the evolving risk and return characteristics of timberland investments?
  • How do we evaluate marginal, forestry investment decisions as new technologies (such as high performing seedlings) and new markets (such as wood bioenergy) evolve?
  • How do various timberland investment vehicles – from timberlands to timber REITs to forest industry ETFs – affect overall investment portfolios?

An article just published in the New York Times by Tim Gray highlights the continued uncertainties and embedded opportunities in studying these questions (“Seeing the Forest for Its Hedges” in the July 11, 2010 print edition).  And yet this article also advances, without challenge, questionable arguments.  For example, timberlands may or may not hedge inflation (click here for a summary of the research on this topic).  In addition, the quote from timber-bull Jeremy Grantham fails to distinguish between investing in timber versus timberlands.  Timberlands – not timber – have shown a record of rising prices.

The realities of and expertise required to own and manage timberland assets sit apart from the liquidity of publicly-traded vehicles.  The finance of timberland investments continues to teach us how alternate timber-related investments – while anchored to a common asset – provide distinct and self-defined investment performance.

*This theme will be addressed further during the “Applied Forest Finance” and “Valuing Timber REITs” courses on August 4, 2010 in Atlanta, Georgia

Timber REITs: Weyerhaeuser’s Conversion and Special Dividend Timeline

9 07 2010

Interested in owning Weyerhaeuser (WY) shares prior to a special dividend distribution? In 2009, the company announced its intent to convert to a timberland-owning real estate investment trust (timber REIT).  With this likely to occur in 2010, it requires WY to issue to shareholders a special, taxable dividend of its undistributed earnings and profits.  Expected to total $5.5 to $5.7 billion, the dividend will be paid out in cash (up to 10%) and WY common shares.*

While the exact timing of the payout has yet to be determined, a general timeline (below) based on information from WY shows how the special dividend affects current and potential shareholders.

*This theme will be addressed further during the “Applied Forest Finance” and “Valuing Timber REITs” courses on August 4, 2010 in Atlanta, Georgia

Timber REITs Outperform S&P 500; Class Teaches Timber REIT Valuation

2 07 2010

On the evening of August 4th, 2010, Neena Mishra, our Director of Equity Research, and I will teach a Master Class on “Valuing Timber REITs.”  This follows our day-long course on “Applied Forest Finance”, which is co-taught by our Forest Economist, Dr. Tim Sydor.  Why teach these classes?  Demand for and interest in timber-related investment vehicles: timberlands, timber REITs and forest industry ETFs.

Publicly-traded timberland-owning real estate investment trusts, as measured by the Forisk Timber REIT (FTR, “footer”) Index, continue to outperform the S&P 500 (see table below).  The FTR Index includes Plum Creek (PCL), Rayonier (RYN) and Potlatch (PCH).  Weyerhaeuser (WY) will join the Index once, if expected, it completes its REIT conversion later this calendar year.

Why the strong interest?  Once we cut through the traditional arguments for timberlands – strong long-term risk-adjusted returns, effective portfolio diversification, potential/possible inflation hedge – timber-related investments provide simple, stable business models.  Timberlands and timber REITs generate cash and appreciation through maximizing the value of hard assets through the business cycle.

The biggest risk for a potential investor is paying too much to get in.  The biggest risk for a current investor is sub-optimizing the assets under management.   As such, key metrics for evaluating timber REITs include net asset value (NAV), relative performance against private timberland investments and cash flows, both current and expected.

Please join us August 4th to learn more and participate in a hands-on session.