Timber REITs: How Does Rayonier’s Stock Split Affect Shareholders?

30 08 2011

On July 25, 2011, Rayonier (RYN) announced that its board of directors approved a three-for-two stock split. On August 24, 2011, the company issued one-half additional share for each share held to shareholders of record as of August 10, 2011. As a result, RYN’s share price adjusted from $60.78 on close of August 24, 2011 to $40.52 on open of August 25, 2011 to reflect this split.

How does this split affect RYN shareholders? Technically, it doesn’t.  Assuming a shareholder owns 100 shares of RYN pre-split and 150 shares post-split; the total value of these shares remains unchanged, as does RYN’s total market capitalization (see table). Both the size of the pie and the slice of the pie held by a shareholder do not change.

Why split? A stock split often occurs when companies have seen their share price increase to levels that look expensive relative to price levels of other companies in the sector. After the split, shares look more affordable and attractive to small investors, which can boost demand. The increased number of outstanding shares also boosts liquidity.  Year-to-date, RYN has returned 15.38% to investors, while most other timber REITs have shown negative returns. In 2010, RYN’s share price appreciated 31.74%. Post-split, RYN’s share price ($40.40) looks more in-line with its peers, like Plum Creek-PCL ($ 36.34) and Potlatch-PCH ($32.99) as of close of August 26, 2011.


Tax Treatment of Timber REIT Dividends (in under 150 words)

16 08 2011

A duck walked into the doctor’s office and asked, “Doc, how do you treat timber REIT dividends?”….

Distributions from real estate investment trusts (REITs) have three elements:

  1. Distributions representing firm Operating Income are taxed at investors’ ordinary (marginal) tax rates.
  2. Capital Gains distributions – from the sale of income-producing properties – are taxed as…capital gains (15% for most investors).
  3. Return of Capital Distributions, which essentially represent the original cost of sold properties, are not taxed.

Relative to other REITs, timberland-owning REITs benefit from an attractive tax profile at the investor level. Timber REITs derive substantially all of their income from selling standing timber (pay-as-cut) contracts and income from these contracts is treated as long-term capital gains.  (see Table for 2010 results for three timber REITs)

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

Timber ETF Update: What are They Holding and How Have They Performed?

14 08 2011

In November 2010, we posted an introduction to the two available timber-related ETFs (exchange traded funds): Guggenheim Timber Index ETF (CUT, launched in November 2007) and iShares S&P Global Timber and Forestry Index (WOOD, launched in June 2008):

  • CUT tracks the performance (before Fund’s fees and expenses) of the Beacon Global Timber Index. The Index is designed to track the performance of common stocks of global timber companies. The fund currently has 27 securities and total assets of $176.9 million as of August 12, 2011.
  • WOOD tracks the performance (before Fund’s fees and expenses) of the S&P Global Timber and Forestry Index. The Index is now comprised of 31 global publicly traded companies that own, manage, or are involved in the “upstream supply chain” of forests and timberlands. As of August 12, 2011, WOOD managed total assets of $222.1 million.

The figure shows key performance metrics and the top ten holdings for each ETF:

As we noted in November 2010, these ETFs do not provide a good proxy for investing in timber. Why not?  In addition to holding equities in firms involved with managing timberlands, they maintain a substantial exposure to manufacturing companies. Of the two, WOOD has a greater weighting towards US domestic producers and timber REITs.

While both ETFs show negative returns YTD and since inception, they have had profitable runs.  For example, in mid-2009, CUT went on a 72.22% tear while WOOD yielded 46.68%.  In addition, both ETFs performed well in the 12-months prior to and through the March 2011 earthquake in Japan, which corresponded to strengthened forest products demand in China.

Timber REITs and Wood Bioenergy: Where’s the Overlap?

12 08 2011

The four publicly-traded timber REITs in the US – Potlatch (PCH), Plum Creek (PCL), Rayonier (RYN) and Weyerhaeuser (WY) – own timberland in 24 of the 50 states.   Where do these assets sit relative to evolving wood bioenergy markets that could provide additional demand for timber?  One way to look at this is to consider where the timber REIT ownerships sit relative to states with legislative mandates, called “Renewable Portfolio Standards” (RPS) and initiatives, referred to as “Renewable Portfolio Goals”, in place for increasing the generation of renewable energy.

The DOE-funded Database of State Incentives for Renewables & Efficiency (DSIRE) publishes updates on programs and incentives that promote renewable energy and energy efficiency.  This includes maps that summarize activities at the state level (see map).  Where do current policies overlap with timber REIT forests?

  • States with timber REIT timberland: 24
  • States with RPS (29) or renewable portfolio goals (7): 36
  • Timber REIT states with RPS (11) or renewable portfolio goals (3): 14
In sum, of the 24 timber REIT states, 14 have  some sort of renewable energy policy in place, while 10 (mostly in the US South) do not.

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: Sector Up and Down in 2011; Still Outperforms S&P

9 08 2011

Risk management is back in vogue.  S&P’s downgrading of US sovereign debt last Friday to AA+ from AAA sparked sell-offs across world markets.  Yesterday (Monday August 8, 2011) scored Wall Street its worst day in over two-and-a-half years.  Meanwhile, how have timberland-owning REITs fared?  The good news: better than the overall market.  The bad news: it’s been a roller coaster ride there this year as well.

Year-to-date, following S&P’s downgrade on Friday August 5, 2011, the Forisk Timber REIT (FTR) Index of public timber REITs returned -0.28% versus -4.63% for the S&P 500 Index.  This is consistent with history.  While the S&P outperformed the FTR Index in 2010 (12.78% versus 8.39%), the FTR outperformed the S&P over three, five and ten-year investment periods leading up to 2011.  In other words, timber REITs performed well for buy-and-hold investors.

This year, timber REITs have bounced around.  The sector’s market cap increased nearly $5 billion in the first quarter (21.1%), and retreated 6.6% in the second quarter (see figure).  The market swoons of July and early August brought the sector, as a group, back to where we started for 2011.

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 Outperform S&P, Private Timberlands and Other REITs for 1Q, 2Q 2011: Why?

4 08 2011

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.

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: Sector Offsets Weak Log Markets in 2Q 2011 with Profitable Export Activities and Fibers Businesses

1 08 2011

Last week, we posted how Plum Creek (PCL) and Potlatch (PCH) offset weak log markets in 2Q 2011 with land sales. The balance of the public timber REITs, Rayonier (RYN) and Weyerhaeuser (WY), have also reported their results and, as expected, housing-exposed business segments exhibited weakness.  Alternately, improved log volume and pricing in the Pacific Northwest and stronger results from their Fibers businesses provided good news.

On July 28, 2011, RYN reported 2Q 2011 net income of $56 million or $0.67 per share, up from $0.48 per share in 2Q 2010, but six cents short of the consensus estimate. Forest Resources had operating income of $11.8 million, up from $8.7 million for prior-year quarter, thanks to higher harvest volumes and improved export pricing in the Northwest and New Zealand. The company continues to defer harvest in its Atlantic and Gulf regions. Real Estate income was $5.0 million, just up from $4.1 million in the prior-year quarter.  During the quarter, the company acquired or had contracts pending for ~65,000 acres of timberlands. Performance Fibers operating income was $71.1 million, up from $45.0 million in the prior-year quarter, due to improved pricing. Wood Products showed an operating loss of $1.0 million compared with income of $4.3 million in 2Q 2010, primarily due to weaker lumber prices. Management maintained its guidance for FY 2011 earnings of between $2.85 and $3.10 per share, on a pre-split basis. RYN recently announced a three-for-two stock split and an 11% increase in the quarterly dividend.

On July 29, 2011, WY reported 2Q 2011 net operating earnings (before special items) at $0.06 per share, down from $0.20 per share in the same quarter a year ago and three cents short of the consensus estimate. The Timberlands segment reported operating income of $111 million, up from $69 million a year ago. Higher volumes and prices in the West, resulting from stronger demand from China, Japan and Korea supported the results. Cellulose Fibers had operating income of $81 million, up from $76 million in 2Q 2010, due to higher prices. Wood Products resulted in an operating loss of $61 million, compared with a loss of $4 million in the prior-year quarter. Real Estate reported a decline in operating income to $8 million from $27 million in the quarter a year ago. WY expects lower income from the Timberland segment in 3Q 2011, due to slowing export demand and higher costs. Previously announced sales of the hardwood and shipping businesses will close during the third quarter.

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