Timber REITs: Recent Results and Benchmarking Performance

22 09 2010

Publicly-traded timber REITs – Plum Creek (PCL), Potlatch (PCH), and Rayonier (RYN) – continue to outperform the S&P 500, as measured by the Forisk Timber REIT (FTR, “footer”) Index.  Key results as of September 20, 2010 include:

  • FTR Index up 5.47% (annualized) year-to-date compared with 1.32% (annualized) for the S&P 500.
  • FTR Index currently comprises 3.72% of the market cap of all publicly-traded real estate investment trusts (REITs).
  • Assuming Weyerhaeuser (WY) completes its REIT conversion this year, timber REITs will exceed 7% of total public REIT capitalization.

Looking back, the per-acre operating income generated from the timber REITs, WY (still a C-corporation) and private timberlands (as reported by NCREIF) varied based on tax structure, financial reporting differences, geographic locations of the timberlands, alternate access to end markets, and forest types (see figure below).

Looking forward, good timber REIT income generated from increasing demand and prices for wood raw materials depends on the revival of the housing markets and resulting increased demand for lumber.   Recent reports provided a spot of positive news.  Housing starts rose 10.5% in August, to a seasonally adjusted annual rate of 598,000, compared to the consensus expectation of a 0.2% decline to 545,000. A 32.2% jump in multifamily starts, which represent a small and volatile portion of the housing market, drove the increase. Building permits also rose 1.8% for the month, though year-over-year, total permits were down 6.7%. In response to the better-than-expected data, the lumber futures contract on the CME rose $10, the daily limit, to $232 per MBF.

For FTR Index calculation methodology and to subscribe to the free FTR Weekly summary, click here.

For information regarding Forisk Equity Research and quarterly coverage, please contact Brooks Mendell, bmendell@forisk.com.

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Slow Housing Recovery Reduces 2011 Pine Sawtimber Forecast for US South by 6%

15 09 2010

Anemic housing construction – and the resulting impacts on lumber demand – has delayed the expected recovery of pine sawtimber prices this year.  Still, several states show signs of resiliency.  We just completed the mid-year update of our 10-year, state-by-state Forisk Forecasts for pine sawtimber and pulpwood stumpage in the US South.  Comparisons across states reflect the variability across local timber markets as sawmills retool and bioenergy projects come on-line.

South-wide, our update indicates pine sawtimber prices will be 6.4% lower in 2011 than expected six months ago.  Results vary across states, with Alabama, Arkansas, Georgia and South Carolina best positioned to rebound quickly as lumber demand strengthens and increases the demand for pine sawtimber logs.  According to our Forest Economist, Dr. Tim Sydor, “Expectations for key macroeconomic factors – such as growth and housing starts – have, frankly, proven way off-base. GDP grew faster than expected, but housing starts are expected to remain 30% below 2009 projections.  As a result we’ve adjusted our forecast of US softwood lumber consumption downward by 6.3 billion board feet for 2010.  Lower lumber demand means lower stumpage prices, and pine sawtimber prices in the South have been revised downward by nearly $1 per ton for the year.”

With the forest products industry in a holding pattern until housing returns, I describe 2010 as a “bridge” year and emphasize to investors the benefits of patiently following local markets.  From a timberland investment standpoint, markets with attractive price-to-demand relationships feature well-capitalized mills and resilient loggers and wood suppliers.