Do Timber REITs Lead or Ride the Coattails of Investor Interest in Real Estate Markets?

21 11 2011

Last week, the Wall Street Journal reported on the rush of investors buying into publicly-traded real estate investment trusts (“Real-estate investors target neighborhood that is looking up,” Wall Street Journal, 11/15/11).  According to Citigroup Global Markets, investors, year-to-date, invested 18% more capital into publicly-traded REITs than in all of 2010, and 400% more than in 2009.  Holy groupthink, Batman!

This stampeding herd of buyers returning to public real estate markets reminds me of the African proverb “you can’t run and scratch your foot at the same time.”  As a reluctant runner, I welcome an excuse to pause and scratch a puzzling itch or three.  First, why the interest in REITs generally?  Second, how does this look within the context of the overall market?  Third, how do timberland-owning REITs score during this investment cycle?

REIT investments satisfy the hunt for yields.  With capital looking for “relative” safety and valuing a return to fundamentals, public REITs attract investors eyeballing the steady cash flows and requirement to distribute earnings quarterly.  Within the REIT sector, certain sub-sectors have outperformed the broader REIT market.  According to NAREIT, total 2011 returns on apartment buildings and self-storage properties averaged ~10% and ~22%, respectively, through the first week of November.  Nice.

However, a closer look at the numbers indicates the article made a mountain out of a molehill.  Overall, REITs appear to be tracking the market.  REITs YTD through November 18th returned -2.25% versus -3.34% for the S&P 500 versus….-2.69% for public timber REITs according to the Forisk Timber REIT (FTR) Index.  While real estate often satisfies objectives to diversify portfolios, this has proven more difficult in the context of a European debt crisis, failing efforts to balance U.S. budgets, and lagging demand for homes and construction.

What about timberland investments?  Year-to-day through Q3, according to NCREIF, equity investments in timberlands returned 1.06% and -0.35% in the third quarter.  For reference, with dividends included, public timber REITs as measured by the FTR Total Returns Index generated 0.63%.

The FTR Index includes Plum Creek (PCL), Rayonier (RYN), Potlatch (PCH) and Weyerhaeuser (WY). As of 11/18/11, publicly-traded timber REITs comprise 4.99% of total public REIT capitalization.

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What Can Marching Bands Teach Us About Tracking Wood Demand and Timber Markets?

8 11 2011

When tracking wood demand and timber markets, we look not only to the past and to the future for guidance, but also to the side – peripherally – to gauge performance across markets and sectors.  Heather Clark, our Customer Relations specialist and a former member of the UGA Red Coats Marching band, shared a useful analogy.  In a marching band, peripheral awareness is called “dressing the line,” and it serves to maintain formation and, ultimately, performance.  What can we learn from looking through the corners of our eyes at trends across wood markets over the past few months?

Wood Demand: Pine sawtimber demand declined ~1% across the South, primarily driven by curtailments at plywood mills. While demand declined less than expected, pine sawtimber prices, according to Timber Mart-South, declined 5.1%, more than expected. Dry weather and selling by timberland owners eager for cash flows may have pushed prices to new lows. Pine pulpwood demand increased 1.7% in the South and demand for hardwood pulpwood held steady in Q3 2011; stumpage prices for both products declined.  We continue to monitor softwood lumber and pulp prices, and the proposed lower design values for SYP lumber.

Wood Bioenergy Markets:  Industrial pellets for export to European utilities lead all bioenergy activities. For example, F.E. Wood & Sons plans to build a 300,000 ton/year pellet plant in West Baldwin, ME. German Pellets plans to build a 500,000 metric ton/year pellet plant in Woodville, TX. Westervelt Renewable Energy held a groundbreaking ceremony at its 250,000 metric ton pellet plant site in Aliceville, AL in October.

Forest Finance:  As demand for pulpwood increases in select local markets, forestland owners have called to ask “when should I clearcut for pulpwood versus manage for sawtimber?”  We published research commissioned by NAFO that addresses this issue at a regional level (click here).  In February, I will detail the step-by-step financial analysis required to answer this question for specific timberland ownerships and markets as part of our Applied Forest Finance course on February 9, 2012 in Atlanta.  For more information, click here.





471 Operating and Announced Wood Bioenergy Projects in the United States

2 11 2011

As of October 30, 2011, Wood Bioenergy US includes 471 wood-consuming, announced and operating bioenergy projects in the continental US.

  • In total, these projects represent potential, incremental wood use of 135.9 million green tons/year by 2021.
  • Based on Forisk analysis, projects representing only 73.0 million tons/year pass basic viability screening. Click here to download the free summary.

How does Forisk screen projects?  Amanda Lang, Managing Editor of Wood Bioenergy US, prepared the following “summary in one slide” to outline the process.  (For those interested in the complete history and methodology of the screening process, click here to access our 2010 bioenergy screening white paper.)

Forisk’s ongoing research includes this project-by-project screening to better understand how capital is being allocated in the energy and forest industries as it relates to markets for wood and timber.  Examples of project-specific updates from October include:

  • F.E. Wood & Sons plans to build a 300,000 ton per year pellet plant in West Baldwin, ME. The plan is contingent upon signing contracts with pellet customers and the state of Maine restoring a key rail line.
  • Enviva will supply wood chips to Dominion’s biomass conversions at the Hopewell and Southampton power stations in Virginia. The 50 MW power stations are planned to begin operations in 2013.
  • German Pellets plans to build a 500,000 metric ton per year pellet plant at a former chip mill site in Woodville, TX. The company plans to start operations by early 2012 and will export pellets to Europe.
  • Liberty Green Renewables dropped plans for two 32 MW biomass plants in IN and asked the Department of Environmental Management to revoke air permits.
  • ZeaChem signed an agreement with Pacific Ethanol to provide operating and accounting services to its Boardman, OR plant starting in the fourth quarter of 2011. The 250,000 gallon per year plant is planned to be operational in 2011 and is located adjacent to the Pacific Ethanol Columbia plant.

To purchase the subscription version of Wood Bioenergy US, including the full project list, please click here to visit the Forisk Store.