Wood Demand Down at Sawmills, Up at Pulpmills in Q2 2011

28 07 2011

Despite optimism that pine grade demand would increase during Q2 2011 in the US South, it fell slightly by 0.6% to 18.4 million tons at 424 mills that consumed pine grade.  Although small, this was the first drop since Q3 2010.  That said, pine grade demand remains significantly below where it was five years ago when it exceeded 27 million tons in Q2 2006.  And while demand fell at sawmills, it increased 2.9% at plywood plants.

Hardwood sawtimber demand fell for the third consecutive quarter, though by less than 1% across 518 mills in the US South. Mill contacts reported relatively stable markets, but depressed prices for hardwood end products tightened margins.  Current wood demand is 78% of where it was five years ago.

Pine pulpwood and direct chip consumption increased 1% overall for the quarter across 196 forest industry and bioenergy facilities in the South, though demand at OSB plants fell 4.7%.  Hardwood pulpwood demand also increased by 1% in the South.

Forisk’s Wood Demand Research tracks 2,729 wood using mills in the US. For the complete, free Q2 2011 Forisk News, click here.


Timber REITs: Land Sales Offset Weak Log Markets for PCL and PCH in 2Q 2011

27 07 2011

Second quarter 2011 results reported by Plum Creek (PCL) and Potlatch (PCH) the past two days indicated continued weakness in those segments affected by housing markets (timber harvesting and wood products manufacturing).  Both firms somewhat offset lower timber harvesting cash flows 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.

PCL reported its 2Q 2011 earnings at $44 million or $0.27 per diluted share, two cents short of the consensus estimate. Operating income from Northern Resources remained unchanged year-over-year at $3 million, while Southern Resources’ operating income came in at $15 million, down from $24 million a year ago. Due to weak pricing, the company further reduced its sawlog harvest in the South by ~100,000 tons.  Real Estate reported operating income of $50 million, up from $26 million in 2Q 2010, from large conservation sales in Florida, Arkansas and Louisiana. Manufacturing income was $5 million, compared with $8 million (excluding one-time gains) in the prior year quarter.  Management lowered its guidance for 2011 operating income to $1.15­­–$1.30 per share, reflecting lower harvest levels and weaker Southern sawlog prices. The company will complete its previously announced acquisition of 50,000 acres of timberland during 3Q 2011.

PCH reported net earnings of $8.4 million or $0.21 per diluted share, in-line with consensus estimates. Resource segment operating income was $7.5 million, down from $15 million in 2Q 2010. Harvest levels were down both in the Northern and Southern regions. Real Estate operating income was $11 million, as the company sold ~12,000 acres of non-strategic land and ~2,000 acres of rural land. Wood Products income was $2.8 million, down from $6.0 million in 2Q 2010.

Timber REITs, End Markets for Wood, and Regional Timberland Ownership

22 07 2011

Who buys the trees grown by timberland-owning REITs?  Timber REIT returns depend on strong demand from end-use markets for forest products such as lumber, plywood, pulp and OSB.  This explains the dependence that timber REITs have on  housing markets.  Low demand for new construction equates to low demand for wood-based building products.  As the man said on School House Rock, “the knee bone is connected to the shin bone……”

From the point of view of an individual forestland owner, wood demand is also a function of the proximity of wood-using mills relative to the timberland property.  From an economic standpoint, the value of the trees grown depends wholly on the ability of nearby mills to pay for and convert these trees into higher valued products.  Timber REITs, which own timberlands in multiple markets throughout the US and across states, are simply aggregations of multiple local markets, rolled up into a portfolio of timberland ownerships.  As seen in the figure below, timber REIT forest assets vary across and within regions with respect to forest characteristics, end market opportunities, and current and future timber prices.

The figure highlights data in thousands of acres:

To learn more about timber REIT assets, strategies and valuations, participate in the “Investing in Timber REITs” workshop on August 23rd in Atlanta.

Timber REITs and Joint Ventures

21 07 2011

How can timber REITs leverage their available capital, given the fact that they must distribute, and cannot retain, earnings?  Over time, timberland-owning REITs have identified and employed multiple investment strategies to leverage available capital.  These strategies include:

  • “Recycling capital” through programs such as 1031 like-kind exchanges;
  • Buying back company shares through repurchasing programs; and
  • Organizing joint ventures (JVs) to share risk, access capital  and leverage expertise.

In the end, each of these represent approaches to enhancing returns from the same pool of internal capital and assets.  In this post, I focus on JVs related to timberland.

Timber REITs, like their vertically-integrated forest industry predecessors and cousins, have structured JVs to invest in manufacturing assets and explore emerging bioenergy markets (for example, consider Weyerhaeuser’s JV with Chevron).  However, unlike REITs that focus on commercial real estate, JVs specific to timberland assets remain relatively uncommon.  One notable exception is Plum Creek’s (PCL) “Timberland Venture” with The Campbell Group (TCG), a timberland investment management organization (TIMO).

In October, 2008, PCL contributed 454,000 acres of Southern timberlands and TCG contributed $783 million in cash to Southern Diversified Timber, LLC (“the Timberland Venture”).  In exchange, PCL received a $705 million preferred interest and a 9% common interest, while TCG received 91% of the Timberland Venture’s common interest.

PCL’s preferred interest entitles it to a cumulative preferred return equal to 7.875% per annum.  TCG manages the JV’s timberlands, which are located in six states: Oklahoma, Arkansas, Mississippi, North Carolina, South Carolina and Georgia.

For PCL, the JV transaction was both earnings and cash flow accretive, while allowing the firm to maintain an interest in potential upside.  Separately, PCL received cash of $783 million through a loan from the JV. The transaction, structured as such, provided certain tax advantages relative to standard divestiture, and supplied PCL with capital that was used, in part, to retire debt and repurchase stock.

To learn more about timber REIT strategies and valuations, participate in the “Investing in Timber REITs” workshop on August 23rd in Atlanta.

Who are the Top Owners and Managers of Timberland in the US?

15 07 2011

According to Forisk tracking of timberland ownership, 58 firms currently own or manage in excess of 100,000 acres of timberlands in the United States.  These firms feature the following descriptive statistics:

  • As a group, they own/manage 57.6 million acres of US timberlands.
  • On average, they own/manage 993,000 acres of US timberlands.
  • The median ownership is 473,000 acres.
  • Assuming a conservative average per acre value of $1,500, each firm owns or manages on average $1.49 billion in timberland assets.
The top 20 timberland owners as of 2011 are listed below:

Timber REITs: Outperformed Other Real Estate, Equities and Commodities YTD

12 07 2011

In an earlier post (February 15, 2011), we wrote about the pace-setting performance of timberland-owning REITs, as measured by the Forisk Timber REIT (FTR) Index, vis-à-vis other asset classes. In revisiting this theme after close to two quarters of stomach-churning monetary and fiscal angst in global economic markets, we continue to find the timber REITs drubbing other core asset classes.

Gold, which started the year sluggishly, did benefit from concerns over the European debt crisis, slow US growth and rising inflation in emerging economies. These factors supported the worldwide thirst for Gold as a safe haven investment and inflation hedge.  It also resulted in a divergence between gold and other commodities which rely on industrial uses.

Safe haven investments also supported U.S. treasuries as global investors continue to focus on the European debt crisis while maintaining the belief that the U.S. government will break its impasse, and maybe strap on its big boy pants and break some bread, to lift the debt ceiling and avoid a ratings-damaging default.

Notwithstanding the concerns regarding housing markets in particular and broader markets in general, timberland-owning REITs have outperformed most other major asset classes year-to-date (see table).

These results reinforce the investors’ view of timber REITs as attractive for their long term value. While the cash flows remain muted during the housing slump, the timber assets continue to grow.

To learn more about timber REITs, participate in the “Investing in Timber REITs” workshop.