Years ago, I held shares in Crown Pacific Partners, a timberland-owning firm headquartered in Portland, Oregon. During market declines in the late 1990s, the firm subsidized its shareholder distributions through borrowing and cash generated from non-organic business activities. In other words, the firm ate its seed corn. Crown Pacific filed for bankruptcy in 2003.
My shareholding experience with Crown Pacific influences my research to this day; it provided valuable lessons on the available (and unavailable) levers for cash generation and risk mitigation with timberland investment vehicles. From this point of view, Potlatch’s (PCH) recent announcement to reduce dividends and harvest levels reflect sound, investment-strengthening decisions to protect long-term shareholder interests. Decisions by the PCH Board and senior management (1) place long-term asset values and maximization over short-term yields and (2) embrace the realities of knowable, quantifiable impacts on wood markets relative to speculative forecasts of key demand drivers.
PCH actions reinforced key messages we shared with clients in 2011 based on our equity research:
- Analysts have “over forecasted” stumpage prices. The pine grade stumpage markets in the South face measurable pressure for 2+ years.
- Georgia-Pacific’s decision to close its Crossett, AR facility moved the needle.
- Among the timber REITs, PCH is one of the two most directly exposed to US housing numbers. Our January 2011 research detailed this relationship. CEO Mike Covey has been explicit regarding PCH dependence on US housing numbers, and how it affected Board discussions related to the dividend.
Equity markets appear to have embraced the PCH 39% reduction in its yield. While share volume spiked on the day of the announcement, PCH’s share price declined 2.2% after two days of “post announcement” trading. This left its dividend yield at 4.1%, in line with the other public timberland-owning REITs (see table). According to the FTR Index, the timber REIT sector now has a 4.0% dividend yield.